Pakistan Steel industry’s outlook

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  • We upgrade ASTL to a Buy with a June 2021 TP of PKR49/sh (up 20% from our last update). Our June 2021 TP on MUGHAL has been revised upwards to PKR73/sh but we maintain Neutral stance on the scrip.
  • The revision in our earnings estimates and valuation stems from (i) higher expected domestic sales during FY21f, which is indicated by the robust local cement dispatches, (ii) sharp decline in interest rates amid high debt burden, and (iii) lower cost pressures due to strengthening PKR and an imminent reduction in power tariff.
  • Future prospects have improved in light of the normalcy in business operations amid lifting of lockdowns and revival of construction activity (especially private) due to government incentives. We expect sales volumes to revive by c.30% yoy (from a low base) during FY21f.

The recent rally is justified by several positives

The Long Steel stocks in our coverage have rallied c.35% since May 2020. The optimism in share prices was driven by the lifting of Covid-19 lockdowns, government incentives for private construction activity and recently was propelled by robust growth in local cement dispatches (c.18% yoy during 4MFY21). The sharp reversal in interest rates (by 625bps to 7%) and deferment in loan principle repayments have also contributed to rebound in profitability. Lastly, the government has approved reduction in power tariffs (for incremental power consumption), which is another positive for the two long steel producers as they nearly completely rely on national grid. However, we have not yet incorporated the tariff reductions as we await formal notification.

ASTL: All round improvement in profitability; lift to Buy

We upgrade Amreli Steel Ltd (ASTL) from Neutral to Buy; our new June 2021 TP is PKR49/sh (up from PKR41/sh earlier). The key reasons for liking ASTL are premium quality perception and ample excess capacity in light of rising demand. We have revised our FY21/22f EPS estimates to PKR1.57/2.94, where we expect the company to sell 360,000/ 414,000 tons of rebar in FY21/ 22f (60%/ 69% utilization) compared to 283,000 tons sold in FY20. The management also expects over 25% growth in sales during the outgoing year (a strong 1Q witnessed – transitioning into profit). The lower interest rates lead to savings in finance cost of about PKR2.5/sh (after tax). Our gross margins estimates stand at 11.3%/11.7% for FY21/22f (vs. 7.5% in FY20 – due to power tariff one-offs). We estimate cost savings of c. PKR0.7/sh due to lower electricity tariffs from incremental production each year (not yet incorporated).

MUGHAL: Maintain Neutral despite higher estimates

Although we have factored in similar triggers as in case of ASTL for Mughal Steel (MUGHAL), we maintain Neutral stance on the scrip with a June 2021 TP of PKR73/sh. We expect MUGHAL to post EPS of PKR5.31 and PKR7.41 for FY21f and FY22f, respectively (up 10% and 11% from previous estimates). We expect volumetric sales to grow by 36% yoy (from a low base in FY20), on the back of strong cement dispatches in North. MUGHAL’s strategically advantageous location in Punjab allows it to capture a large share of the rising demand – in the absence of erstwhile power supply issues. MUGHAL has been majorly relying on the national grid, but the recent drop in RLNG rates has encouraged it to resume operations of its gas-fired CPP (c.10% of total power requirement). However, in our view it will be a beneficiary of the subsidy on electricity rates.

(Intermarket Securities Limited)

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