Amreli Steel’s rebar capacity enhancement put on halt due to muted economy: PACRA

September 9, 2020 (MLN): PACRA has maintained entity ratings of Amreli Steels Limited at ‘A-’ for long-term and ‘A2’ for short-term, along with a ‘stable’ outlook.

According to PACRA’s press release, the ratings reflect squeezed margins and pressure on the profitability in some recent months. The performance trend line took a dip and the company reported loss in the recent quarter.

The Company achieved capacity expansion of melting from 400,000 tons to 600,000 tons in June 2019 and rebars manufacturing capacity from 180,000 tons to 605,000 tons in June 2018. Rebar capacity will be further enhanced to 1,105,000; however the project has been placed currently at halt due to the muted economy.

The company being 'Champion in selling Rebars' intends not to compromise on its footprint in the markets amid slow infrastructural activity in the country on account of Covid-19 impacts. Steel industry dynamics reflects weakening with squeezing margins driven by depreciation of Pak Rupee; high finance cost also played a negative role which will now be rationalized given decline in key policy rate.

Meanwhile, the governing bodies took several initiatives to reduce the worsening impact on GDP and to stimulate the industry including massive interest rate cut, deferment in principal loan repayment & subsidized loans for salaries of three months to employees. Furthermore, the commencement of announced public development projects will also contribute to strengthen cash flows in the near future.

The volumetric increase (from recently added capacity) improved topline but margins declined driven by hike in direct & indirect cost. Amreli's financial risk matrix is stretched where debt to equity ratio stands at around ~59% owing to significant decline in cash flows & increased reliance on long term & short term financing.

Going forward, the management is expected to focus on optimal capacity utilization to achieve economies of scale and increase its market share while aligning the financial matrix to repay principal amount of loan. However; lock down imposed due to COVID-19 outbreak for around two months of 4QFY20 will impact the profitability for FY20.

The ratings draw comfort from strong business acumen of Amreli Steels' sponsors – Akberali Family. The ratings are dependent on the management's ability to uphold in difficult times and improve its business vis-àvis financial risk profile while operating in a muted economy. Utilization of enhanced capacity and improved margins are vital. Moreover, prudent management of financial affairs remains important.

PACRA

Posted on: 2020-09-07T10:52:00+05:00

36742