JS Securities Limited – Morning Briefing

Karachi, September 19, 2018 (PPI-OT): ASTL: Key takeaways – Analyst Briefing FY18

Amreli Steels Ltd (ASTL) held an Analyst Briefing yesterday to discuss FY18 results and outlook of the company.

The company produced 182,741 tons of rebars during FY18 against 158,206 tons in FY17, whereas production stood at 52,862 tons in 4QFY18, compared to 49,695 tons in the same period last year.

4QFY18 gross margins plunged to 13.2% from 21.2% during 4QFY17, down by 8% YoY, mainly due to provisioning of GIDC (Rs190mn).

Other reasons for decline in Profit before Tax (down 58% YoY) during 4QFY18 include jumps in advertisement exp and higher finance costs.

Management expects a slowdown in demand in the next six months due to lack of direction by new govt.; however, it continues to remain bullish on long-term prospects of the construction industry.

4QFY18 witnesses a drop in Gross Margins

Amreli Steel Ltd (ASTL) held an Analyst Briefing yesterday to discuss FY18 results and outlook of the company. To recall, the company announced PAT of Rs1.59bn (EPS: Rs5.34), up 48% YoY, accompanied by a dividend of Rs2.2/share. On quarterly basis, 4QFY18 gross margins of the company nosedived to 13.2% from 21.2% during 4QFY17, down by 8% YoY. This massive decline is mainly due to 1) provisioning of GIDC (Rs190mn), 2) lower-than-expected production due to KE load shedding resulting in a production loss of ~10k tons (5.5% of FY18 production), and 3) Eid holidays. Other reasons for the decline in PBT in 4QFY18 include (1) Increase in advertisement expenses (2) Increase in short term finance cost due to upward revision in interest rates and an increase in working capital requirement.

Other key highlights

Management also presented the following insights during the Analyst Briefing:

The company has produced 182,741 tons of rebars during FY18 against 158,206 tons in FY17. Whereas, production stood at 52,862 tons in 4QFY18 as compared to 49,695 tons in the same period last year.

ASTL currently has ~5-7% of market share in rebars. Note that, 60% of the market is sub-standard (hence lower priced) rebars and 40% quality rebars.

In overall sales mix during FY18, Sindh and Punjab region contributed 90% and 10%, respectively, whereas, retail and corporate share stood at 60% and 40%, respectively.

Company is expecting 53% utilization at Dhabeji plant and 70% at SITE plant. Relatively lower utilization at Dhabeiji plant is due to issues in producing 10mm size of rebars, which constitute 30% of the production mix.

Going forward, the company expects margins to hover around 17-18%. Management cautioned that it would be difficult to pass on the impact of any increase in cost due to hike in electricity prices. According to company’s estimate, a ~Rs5 per unit increase in electricity charges could lead to Rs4,000/ton rise in cost of production.

Additionally, while management informed that 45cm3 gas is required to reheat billets in its SITE plant, recent increase in gas prices from 600mmbtu to 780mmbtu will increase cost by 400-500/ton. Due to low demand in Punjab Region, management believes it could be challenging for the company to pass on its impact.

As per experts’ advice, the company has only booked tax credit on BMR (65-B). Whereas, tax credit on listing (65-C) and tax credit on equity investment (65-E) have been lapsed. Note that, the company can only avail one tax credit at a time.

Going forward, management expects a slowdown in demand in the next six months due to lack of direction by new govt.; however, it continues to remain bullish on long-term prospects for the construction industry.

On SITE expansion plan, the company remained cautious due to increase in project cost after rupee devaluation. Final update on expansion is expected to be announced in the next Analyst Briefing (post 1QFY19 financial results).