EUR 8.54 For Business Accounts Only

Amreli Steels (ASTL) Earnings revised downward, ‘HOLD’ maintained

• Investment thesis: We have revisited our investment case for Amreli Steels Limited (ASTL) where we have revised down our earnings forecast from EPS of  Rs5.40/6.92 in FY19/20  to LPS of Rs0.46/0.35 . Our investment thesis is based 1) expected slowdown in aggregate demand amidst tightening of monetary/fiscal policy and 2) Rising inflation level in economy and 3) FY20 budgetary measures, which may result in lower pricing power to manufacturers as they are sitting on idle capacities. We maintain our hold call on Amreli Steels (ASTL) as company has underperformed benchmark index by over 50% from  its 52 week high of Rs 81.9.

 

• Economic Slowdown Restricting Industry Growth: Slowdown in economy is evident from 9-year low GDP growth of 3.3% during FY19 & 2.93% YoY decline in Large Scale Manufacturing (LSM) during 9MFY19 vs. +5.71% YoY growth in 9MFY18. Poor economic/construction activities have led the decline of 25% YoY in production of Billets/Ignots during 9MFY19 as per data available on Pakistan Bureau of Statics (PBS) vs. +31% growth in 9MFY18.

 

• Expansions may not Yield Expected Results:  Pakistan steel consumption has grown at CAGR of 19% during last 5 years (FY13-18) which led major listed steel companies to opt for CAPEX. Some of them have already started operations & others are in development phase. However, considering the recent slowdown in economy, we expect most of the incremental capacity to remain dull. To note, ASTL has recently expanded its re-bar production capacity from 180,000 tons per annum to 605,000 tons per annum while they have a long term plan to add another 395,000 tons. This will take its total capacity to 1mn ton/annum.

 

• Margins to Remain Under Pressure: Amidst availability of cheap imported/smuggled billet/re-bar, ASTL will likely have a hard time in achieving the economies of scale which may put GP margins under pressure on the back of competitive pricings and likely increase in energy tariff going forward amid the Govt.’s ambitious target to curtail/eliminate circular debt. We estimate FY19E and FY20F GP margins to clock in 8.37% and 8.00% respectively vs. our earlier expectations of 15% and 14%.

 

• Budget FY20 measures : Uniform FED mode sales tax on steel is imposed in FY20 budget which may lead to upward revision in rebar prices by Rs5-8k/Ton as per our channel checks/estimates which can result in further pressure on volumetric sales. While removal of special regime for tribal areas may not prove to be positive for local manufacturers as the steel from tribal areas is considered to be of lower quality.

 

• Key Risks: We flag following key risk for ASTL: 1)expected devaluation to increase material cost resulting in margin contraction 2)higher inflation 3) lower construction demand 4) Slowdown in economy.