July 06, 2021: The Pakistan Credit Rating Agency Limited (PACRA) has maintained ratings of Amreli Steels Limited (ASTL) at ‘A-’ for the long term and ‘A2’ for the short term with a stable outlook, reflecting a better margin and recovered profitability in recent reported quarter post FY20 losses.
Amreli Steels has a good business profile on account of the company’s market positioning in the industry. The Company produces two key products: i) steel billets, ii) rebars including a) Grade 60 Deformed Steel bars and b) Xtreme bars (G-500W).
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 is currently at a halt for quite some time now on account of tough previous years in terms of the observed contracted economy. The company is 'Champion in selling Rebars' intends not to compromise on its quality and working to increase its footprint in other regions.
Steel Industry dynamics reflect healthy prospects with notable growth in demand on the back of increased private sector spending. The governing bodies also took several measures to boost economy that provided supportive measures including curtailed policy rates, stabilized exchange rates and availability of subsidized financing. However; raw material costs witnessed historically increased prices which has a squeezing impact on margins.
Meanwhile, the commencement of announced PSDP-funded projects is going to contribute towards strong demand to strengthen the cashflows in near future. The volumetric increase (from recently added capacity to capture augmented demand) improved topline but margins did not reflect the wholesome increase due to a proportionate increase in costs. Amreli's financial risk matrix is stretched where the debt-to-equity ratio stands at around 59.7% owing to the significant reliance on long-term & short-term financing for day-to-day working capital requirements.
The performance trend depicting revival after a dip witnessed till last fiscal year. 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 the principal amount of the loan.
The ratings draw comfort from the strong business acumen of Amreli Steels' sponsors – the 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 flourishing economy. Utilization of enhanced capacity while capturing increased demand and sustained margins are vital.
Moreover, prudent management of financial affairs proven vital in the sustainability of the Company.
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