January 18, 2021: VIS Credit Rating Company Limited (VIS) has maintained entity ratings of ‘A-/A-2’ (Single A Minus/A-Two) to Aisha Steel Mills Limited (ASL). Outlook on the assigned ratings has been revised from ‘Negative’ to ‘Stable’.

As per the rating agency, 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. Access to capital markets is good. Previous rating action was announced on October 31, 2019.

The assigned ratings to ASL are underpinned by demonstrated support of the Company’s major sponsor, Arif Habib Group, while also incorporating the Company’s market positioning as one of the only two local players in the flat steel industry. ASL’s rating factors in the business risk of the flat steel industry, which is considered high, given the sensitivity to changes in exchange rate, interest rate and commodity prices. Nevertheless, on a timeline basis, given the reduction in benchmark rates and improved demand outlook – as the government enters its final 2 years, wherein infrastructure spending is likely to pick up – sector dynamics have posted improvement. In view of the aforementioned factors, along with improvement in ASL’s operating performance and sharp pickup in off-take in Q1FY21, the outlook on the rating has been revised.

In FY20 & Q1’FY21, ASL posted strong growth in topline, which increased by 47% and 82% respectively. As a result, the Company enhanced its market share in the flat steel segment from 17% in FY19 to 30% in FY20. The growth in market share is mainly attributable to HDGC capacity enhancement. The Company was able to sustain its gross margin in FY20, lagging historical average of 14% reported between FY16-FY18. The pressure on margins is mainly on account of demand weakening noted during the period FY19-20. Nevertheless, the gross margin has depicted significant improvement in Q1’FY21 (Q1:FY21: 13.2%; FY20: 7.9%). Accordingly, prudently viewed, the Company’s gross margin is expected to post uptick in FY21. Furthermore, the notably reduced interest rates will also provide added stimulus to ASL’s profitability, which, along with the projected uptick in topline, will translate in a positive bottom line for the Company, vis-à-vis loss incurred in FY20.

Cash flow coverage indicators and capitalization metrics (gearing & leverage) were impacted in FY20, as a result of the loss incurred. Nevertheless, improvement has been noted in these metrics in Q1’FY21, a trend which is expected to continue in the short to medium term. Both gearing and leverage have moved down, albeit are still considered to be on the higher side vis-à-vis the rating threshold. Given our profitability projections, gearing is expected to further trend down during the course of the rating horizon.

The assigned rating remains dependent on maintenance of cash flow coverage indicators and capitalization metrics in line with the threshold for the assigned rating.

VIS

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