ASTL’s profit margins may squeeze down due to augmented finance cost: PACRA

July 13, 2022 (MLN): Amreli Steels Limited (ASTL)’s profit margins may squeeze down due to augmented finance cost, Pakistan Credit Rating Agency (PACRA) said in its latest report.

While forecasting the stable outlook of the company, the rating agency said that company’s profits margins may shrink on the back of higher finance cost which will be partially compensated through maintaining optimum inventory levels, and energy efficiencies achieved through BMR and expansion of installed solar plant to 7 MW expected to come online in the start of next financial year.

The rating agency maintained Amreli Steel’s ratings at A- for long-term and A2 for short term. The ratings draw comfort from the 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-à-vis financial risk profile while operating in challenging economic conditions. Retention of its market share and sustained margins are vital. Moreover, prudent management of financial affairs is vital in the sustainability of the Company, PACRA said.

Amreli Steels produces two key products: i) steel billets, ii) rebars including a) Grade 60 Deformed Steel bars and b) Xtreme bars (G-500W). Melting capacity of company is 600,000 tons per annum while its rebar manufacturing capacity is 605,000 tons per annum.

The company reported significant growth in earnings during 9MFY22 as it made profits of Rs1.83 billion compared to Rs925 million in 9MFY21. The volumetric sales and profitability for Mar-22 quarter also showed significant growth from previous quarters as the company rebounded from challenging phase, compounded by Covid-19.

Margins witnessed growth, primarily attributable to increase in margins and local demand. The company having significant presence in Rebars market, intends to sustain on its quality and a wide retail and distribution network spread across Pakistan.

As per the rating agency, elevated risk of recession due to exacerbating levels of inflation and geopolitical instability has slowed down the economic growth worldwide and in Pakistan. Operating in these dynamics, steel industry is grappling with rising challenges again including contained demand, amplified policy rates, continuous depreciation of PKR, augmented energy cost and a slash in PSDP budget.

Amreli's financial risk matrix was stretched where the debt-to-equity ratio stood at around 57% owing to the significant reliance on short-term financing for day-to-day working capital requirements.

The recent period witnessed some respite. Decision to further expand melting and rebar manufacturing facilities has been shelved due to struggling economic outlook. In order to diversify the risk profile, Board has recently approved investment into non-ferrous operations which includes establishing a new facility for production of Aluminium ingots.

Going forward, the management is focused on sustaining the company’s market share and is not aiming towards volumetric growth, the report said.

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