PACRA Downgrades Entity Ratings of Amreli Steels Limited

The steel industry is highly sensitive to economic cyclicality and exposed to fluctuations in exchange rates and international commodity prices. In FY21, the steel industry reached its peak demand, standing at 4.8mln tons, marking an increase of 20% YoY. As demand surged, major players in the industrial sector seized the opportunity to bolster their capacities in anticipation of future growth through leveraging. Amreli, as one of the key contributors, upscaled their melting capacity by 300,000 tons per annum and re rolling capacity by 305,000 tons per annum. However, in the subsequent fiscal year of FY22, demand tapered slightly to 4.7 million tons, and then plummeted steeply to 4 million tons in FY23, significantly impacting the steel industry as a whole. The steel industry, today, faces challenges such as low-capacity utilization, revenue and profitability issues, taxation challenges, higher financing costs, rupee depreciation, and increases in energy prices. Operating within these challenging dynamics has become a significant hurdle for industry players. In FY23, the demand marked a decrease of 16% YoY. Meanwhile, the Company's volumetric sales declined significantly from 361,587 tons to 218,589 tons, representing a material deterioration of 40%. However, the rise in prices somewhat offset this negative impact of volumes, with revenue in FY23 reported to PKR 45,492mln with a dip of approx. 22%. The similar trend is witnessed during 1HFY24 where revenue clocked at PKR 22,251mln (1HFY23: PKR 23,031mln). During the 1HFY24, gross margins experienced a slight uptick to 11.2% from 10.6%, driven by higher prices. However, due to high level of reliance on short-term borrowing and increased finance cost the Company posted a net loss of PKR -634mln (FY23: PKR -678mln). Consequently, the net margin deteriorated to -2.9% from -0.8%. The Company’s current financial risk matrix is in distress. The debt-to-equity ratio of the Company stands at 61.7% due to significant reliance on short-term borrowing for its working capital requirement. Moreover, at Dec-23 the FCFO’s of the Company stood at PKR 1,583mln whereas the finance cost stood at PKR 2,263mln and CMLTD at PKR 1,766mln depicting a stress on the repayment of its finance cost and timely repayment of its current obligations. The rating downgrade is attributed to the depressed demand, which has had a significant impact on the Company's financial standing and its ability to fulfill its financial commitments. The management of the Company has actively indulged in discussion with the financial institutions to figure out the breather for its debt servicing various options, including debt reprofiling are under consideration. Meanwhile the management also undertook other measures including resizing itself according to the demand, sale of nonessential assets and injection of equity through other strategic partner in order to meet the current challenging scenario.
The ratings are dependent on the management's ability to translate strategies along with successful finalization of its reprofiling process. Moreover, the availability of sponsor support to address any shortfall will also be a crucial factor to consider, going forward.

About the Entity
Amreli Steels Limited, incorporated in 1984, obtained listing on PSX on Dec 1st, 2015. The Company is majorly owned by Akberali family (~75%), followed by general public (~15%). Sponsoring family carries over six decades of experience in steel and allied business. The seven-member Board, comprising four members of Akberali family provides adequate guidance to the Company. Mr. Abbas Akberali chairs the Board and is also the founder of Amreli Steel. Mr. Shayan Akberali, leads the Company as the CEO since Aug, 2017. M/s EY Ford Rhodes, CA's, SBP category 'A' have expressed an unqualified opinion on the financial statements for FY23.