VIS assigns ‘Negative’ outlook to Ayesha Steel Mills due to high risk within the flat steel sector

November 01, 2019: VIS Credit Rating Company Limited (VIS) has maintained entity ratings of ‘A-/A-2’ to Aisha Steel Mills Limited (ASL).

Long term entity rating of ‘A-’ reflects good credit quality, adequate protection factors. Risk factors may vary with possible changes in the economy. Short Term Rating of ‘A-2’ indicates good certainty of timely payment, sound liquidity factors and company fundamentals.

The assigned ratings to ASL are underpinned by demonstrated support of the Company’s major sponsor, Arif Habib Group. Ratings also incorporate existing industry structure whereby ASL is amongst the only 2 local players in the flat steel industry.

Recent commencement of enhanced Cold Rolled Coil (CRC) production capacity along with entry in Galvanized Coils (HDGC) market is expected to improve market position and diversify product offerings. While financial profile has remained stressed during FY19 and 1QFY20 given weakening in leverage indicators and decline in cash flow coverages, reaffirmation of ratings incorporates limited principal repayment to be made during FY20.

Management expects significant uptick in sales volumes and reduction in quantum of working capital borrowings (primarily due to recent sharp decline in international HRC prices) to result in improvement in financial profile during FY20. Ratings remain dependent on materialization of projected sales volumes & margins, reduction in leverage indicators and mismatch on balance sheet and continued sponsor support.

VIS considers flat steels sector to comprise high business risk given the significant volatility in steel prices & HRC- CRC margins and threat of dumping. This along with weak demand dynamics expected to persist during FY20 and increased competition post capacity expansion by both players is expected to impact pricing power and profitability of the sector. However, local players expect sales to be supported by decline in imports (currently imports are sizeable) due to imposition of preliminary Anti-Dumping Duty (ADD) on flat steel imports from Russia (majority of imports in FY19 emanated from Russia) and Canada in addition to improved implementation of existing ADD.

Synchronization of demand with increased supply and decline in quantum of imports is considered important, going forward. Given the high business risk of the flat steel sector, weak demand dynamics of industries catered to by ASL and elevated leverage indicators, Outlook on the assigned ratings has been revised from ‘Stable’ to ‘Negative’.