PACRA downgrades Amreli Steels rating, outlook stands negative

October 03, 2024 (MLN): Pakistan Credit Rating Agency Limited (PACRA) has downgraded the entity ratings of Amreli Steels Limited (PSX: ASTL) from "BBB" to "BB" for the long-term and "A3" for the short-term with a negative outlook forecast.

ASTL is one of the largest manufacturers of steel reinforcement bars. The Company produces two primary products: i) steel billets and ii) rebars, which include a) Grade 60 Deformed Steel bars and b) Xtreme bars (G-500W).

Correspondingly to FY23, the steel industry continues to grapple with grave challenges such as subdued demand, PKR depreciation, high financial costs, and record-high power rates, along with a substantial increase in input costs.

These challenges led the steel industry to fight for its sheer survival. Resultantly, many steel mills are working at a small fraction of their capacities and few are on the verge of closure.

Amreli Steels has not been immune to these macroeconomic pressures, leading to a sharp decline in its volumetric sales in FY24.

Revenue dropped by 15%, reaching approximately Rs39 billion (FY23: Rs45bn). D

ue to constrained demand, the company has been unable to pass on the increased production costs to consumers, resulting in gross margins being halved to 6% in FY24 (FY23: 13%).

Furthermore, the company's operating margins have turned negative in FY24, reflecting a significant strain on its financial position. Amreli Steels heavily relies on short-term borrowings (STB) for working capital management, in line with industry practices.

The company also took out long-term loans to expand production capacity following a surge in demand in FY21.

However, negative operating margins, combined with high finance costs, levies, and taxes, have further weakened the company's already fragile financial standing, leading to a massive net loss of PKR 6 billion.

The downgrade in the company's credit rating is due to its deteriorating financial condition, its reduced ability to meet financial obligations on time, and heightened pressure on debt repayment in FY24.

Moreover, previously announced strategies such as debt reprofiling, downsizing, selling non-core assets, and bringing in equity through a strategic partner have not yet significantly materialized.

Currently, Amreli is in discussion with the financial institutions for the comprehensive debt restructuring, the terms of which are under deliberation, and management is confident to close it by end of this calendar year.

The timely conclusion of the debt restructuring as per the proposed plan, may results positive towards the ratings of the Company.

Going Forward, the success of the management's ability to implement these strategies and the availability of sponsor support to address any potential financial shortfall will also play a crucial role in swaying the Company’s ratings.

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