January 21, 2020: VIS Credit Rating Company Limited (VIS) has upgraded the entity ratings of Agha Steel Industries Limited (ASIL) from ‘A-/A-2’ (Single A Minus/A-Two) to ‘A/A-2’ (Single A/A-Two).
Rating of the outstanding Sukuk has also been upgraded from ‘A’ (Single A) to ‘A+’ (Single A). Outlook on the assigned ratings is ‘Stable’. Long Term entity rating of A reflects good credit quality, adequate protection factors.
As per the rating agency, 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. The previous rating action was announced on October 18, 2019.
Agha Steel Industries Limited (ASIL) is amongst the top-tier players in the long steel sector with an installed capacity of billets and reinforcement bars (rebars) at 450,000MTs and 250,000MTs respectively. Recently, in Nov’2020, ASIL was publicly listed on the Pakistan Stock Exchange (PSX). The amount raised in the IPO is planned to be utilized to increase the capacity of rebars to 650,000MTs, which is expected to come online by August’2021.
The assigned rating takes into account the business risk of the long steel sector, which is considered high given the fragmented nature of the industry, prevailing competition and sensitivity to changes in the exchange rate, interest rate and commodity prices. The industry risk profile takes into account strong sovereign protection through a favorable tariff regime. The assigned rating further factors the company’s competitive advantage, which stems from ASIL being the only manufacturer in the country using Electric Arc Furnace for manufacturing of billets. Going forward, the planned completion of phase II, and the resultant cost efficiencies that are expected to materialize, will add to the company’s competitive advantage.
Subsequent to the drop in topline and gross margin noted in FY19, business dynamics posted improvement in FY20, despite the pandemic-induced slowdown. Capacity utilization remains on the lower side, being reported at 61% for FY20. Nevertheless, in view of the lower interest rate and an expected uptick in infrastructure spending, the demand outlook has improved. This is reflected in the growth noted in the LSM Index during Q1’FY21.
In FY20, given the increase in debt, the cash flow coverage of debt has been impacted. Nevertheless, with the notably higher sales off-take in Q1’FY21 and the resultant improvement in cash flows, the DSCR (annualized) has risen above 2x. Going forward, DSCR is expected to remain elevated during FY21, in view of the quantum of debt maturity during the year. Loan repayment cost is expected to spike in FY22, wherein DSCR is likely to fall, albeit should still remain above 1x. Gearing and leverage of the company have trended down on a timeline, and expected to fall further once we incorporate the recent equity infusion. The assigned ratings remain dependent on the maintenance of liquidity, capitalization, and profitability indicators, in line with the threshold.