Amreli Steels Limited

CREDIT RATING REPORT | Oct-24

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
01-Oct-24 BB A3 Negative Downgrade YES
10-May-24 BBB A3 Stable Downgrade YES
10-May-23 A- A2 Stable Maintain -
05-Jul-22 A- A2 Stable Maintain -
05-Jul-21 A- A2 Stable Maintain -
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.

Rating Rationale

Amreli Steels Limited ("The Company" or "Amreli Steels") is one of the largest manufacturers of steel reinforcement bars. The Company produces two primary products: i) steel billets and ii) rebars, which include a) Grade 60 Deformed Steel bars and b) Xtreme bars (G-500W). Correspondingly to FY23, the steel industry continues to grapple with grave challenges such as subdued demand, PKR depreciation, high financial costs, and record-high power rates, along with a substantial increase in input costs. These challenges led the steel industry to fight for its sheer survival. Resultantly, many steel mills are working at a small fraction of their capacities and few are on the verge of closure. Amreli Steels has not been immune to these macroeconomic pressures, leading to a sharp decline in its volumetric sales in FY24. Revenue dropped by 15%, reaching approximately PKR 39 billion (FY23: ~PKR 45 billion). Due to constrained demand, the company has been unable to pass on the increased production costs to consumers, resulting in gross margins being halved to 6% in FY24 (FY23: 13%). Furthermore, the Company's operating margins have turned negative in FY24, reflecting a significant strain on its financial position. Amreli Steels heavily relies on short-term borrowings (STB) for working capital management, in line with industry practices. The Company also took out long-term loans to expand production capacity following a surge in demand in FY21. However, negative operating margins, combined with high finance costs, levies, and taxes, have further weakened the Company's already fragile financial standing, leading to a massive net loss of PKR 6 billion. The downgrade in the Company's credit rating is due to its deteriorating financial condition, its reduced ability to meet financial obligations on time, and heightened pressure on debt repayment in FY24.Moreover, previously announced strategies such as debt reprofiling, downsizing, selling non-core assets, and bringing in equity through a strategic partner have not yet significantly materialized. Currently Amreli is in discussion with the financial institutions for the comprehensive debt restructuring, the terms of which are under deliberation, and management is confident to close it by end of this calendar year. The timely conclusion of the debt restructuring as per the proposed plan, may results positive towards the ratings of the Company.

Key Rating Drivers

Going Forward, the success of the management's ability to implement these strategies and the availability of sponsor support to address any potential financial shortfall will also play a crucial role in swaying the Company’s ratings.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

Amreli Steels Limited

rating analysis

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Profile
Legal Structure
Amreli Steels Limited (The Company) is listed on Pakistan Stock Exchange since 2015. Its shares are traded under the section " Engineering".
Background
The Company was incorporates in 1984 now the Companies Act 2017 as Private Limited Company and has grown from being family owned business towards a formal corporate structure in 2009 by converting to public unquoted Company in 2009. Later in 2015 the Company enlisted on Pakistan Stock Exchange. The Company has two re-rolling plants situated at S.I.T.E. Karachi and Dhabeji based on the most modern hot re-rolling technologies in the industry with a nameplate capacity of 180,000 metric tons and 425,000 metric tons of rebars per annum respectively. The melt shop is situated in industrial zone at Dhabeji, Port Qasim, is constructed on 65 acres of land and has a nameplate capacity of 600,000 metric tons per annum .
Operations
The Company is engaged in the manufacturing and sale of two key products: i) steel billets, ii) rebars including a) Grade 60 Deformed Steel bars and b) Xtreme bars (G-500W). The Company has the largest billet manufacturing plant in Pakistan with a capacity of producing 600,000 tons. The Company’s majority power need is being fulfilled by K-Electric.
Ownership
Ownership Structure
The Company is majority (75%) owned by Akberali family, followed by general public (~14.58%).
Stability
The sponsors holding major stake in the Company bodes well for the stability in the ownership structure. However, the Sponsors are considering the inclusion of strategic partners in order to meet the challenges facing by the Company.
Business Acumen
The sponsors’; Akberali family carries experience of more than six decades of managing steel and allied business. However, operating of business amid the unprecedented factors in the industry for the past 2 years have jogged the alignment of the Company, highlighting a resistance to adapting to the evolving industry landscape.
Financial Strength
Amreli is the flagship entity of sponsors. The sponsors have demonstrated their commitment towards the company by injecting funds in the past but, the support is yet to be seen during these distressed times of the Company.
Governance
Board Structure
The overall control of board vests in a seven-member board of directors, wherein four are from sponsoring family including the Chairman and CEO, while three are independent members.
Members’ Profile
Mr. Abbas Akberali is the chairman of the board. He is associated with the Company since inception and is responsible for the formulating and implementing corporate direction and strategy. The other board members have diverse professional background with relevant business experience.
Board Effectiveness
There are two board committees in place, these include: (i) Audit, and (ii) Human Resource & Remuneration. The audit committee comprises three independent members and one non-executive director. Attendance of board members in board meetings is considered good
Financial Transparency
M/s EY Ford Rhodes, Chartered Accountants, classified in category 'A' by SBP and having a QCR rating, are the external auditors of the company. They have expressed an unqualified opinion on the financial statements for the year ended 30th June, 2023. The Audit of FY 2024 is in process.
Management
Organizational Structure
Amreli has a multi-tier organizational structure. Including two senior positions i) COO-Strategy and ii) COO-Operations and Chief Financial Officer and six functions namely; Marketing, Govt. and Public Relations, Information Technology, Corporate Affairs & Liaison, New Businesses, and CSR and communication reports to COO-Strategy.
Management Team
Mr. Shayan Akberali, the elder son of Mr. Abbas Akberali, is CEO - an engineer by profession and has been associated with the company for the last two decades. Mr. Hadi Akberali, the younger son, has been working as COO – Strategy, Mr. Fazal Ahmed, has been working as ‘COO – Operations" and while Mr. Taha Umer has been appointed as CFO in the current period. The overall management team is considered strong with the relevant understanding of the industry.
Effectiveness
Amreli has five management committees in place. These committees review key performance areas of the company, inter-alia, daily production analysis, yield analysis, mechanical or production breakdown and downtime analysis.
MIS
The company has implemented SAP as an ERP solution with the following operational modules, i) Production planning, ii) Material Management, iii) Sales and Distribution, iv) Finance, v) Controlling, and vi) Human Capital Management including success factor module. Reports generated on daily basis.
Control Environment
Amreli has obtained ISO-9001 certification from Lloyd’s Register Quality Assurance, which shows that the company’s manufacturing processes and procedures are in conformity with international standards.
Business Risk
Industry Dynamics
The country’s annual demand for steel products was recorded at ~11.2mln MT during FY23 (FY22: ~13.6mln MT) down ~17.6% YoY basis, with imports comprising ~39.2% of the total consumption and recording ~42.1% decline YoY. This largely resulted from SBP-imposed import curbs during FY23.High dependence on imported raw material exposes the sector to changes in international raw material prices and exchange rate fluctuations. Going forward, although the SBP has lifted the restrictions on imports, the segment will likely remain exposed to PKR depreciation and high local interest rates, on account of a slowdown in the economy which has managed to continue in FY24.
Relative Position
Amreli Steels is one of the leading players specifically in south region. It is the only steel company in Pakistan with sales offices in Sukkur, Hyderabad, Multan, Lahore, Islamabad and Karachi and has warehouses in Karachi, Lahore and Islamabad. Baluchistan and bypass city traffic. It has a network of 186 retailers currently.
Revenues
During FY24, topline decreased by 15% and stood at PKR 38.78bln (FY23: PKR 45.49bln) mainly due to drop in volumetric sales due to a confluence of adverse factors including record inflation, rupee devaluation, high borrowing cost and political instability. (FY23: PKR 4bln) owing to substantial increase in debt obligations and high policy rate. Resultantly, the company reported a net loss of PKR 6.1bln due to reduced demand and the factors mentioned above.
Margins
During FY24, Amreli Steel’s margins witnessed a decrease on gross level and marked at ~6.2% (FY23: ~13%,) due to high production costs. Operating margins, during the period, have turned negative and stood at -0.33% (FY23: ~8.8%). Resultantly, due to significant increase in financial charges coupled with high levy and taxation, net loss in FY24 stood at PKR (6.1)bln (FY23: PKR (697)mln) and net margins significantly deteriorated to -15.75% (FY23: -1.53%) .
Sustainability
The Company's sustainability in the current industry landscape is under significant risk due to the financial strain and substantial debt obligations. To move forward, a radical shift in strategy is essential. Meanwhile, without bold action and a clear, executable plan, the road ahead will remain challenging. The Company is under discussion with various financial institutions for the restructuring of its debt obligations, successful and timely completion of the arrangement is considered positive for the sustainability of the Company.
Financial Risk
Working capital
During last quarter FY 24 Company's operations remains halted due to the working capital constraints, the management of the Company is in discussion with the banks and is exploring other opportunities to keep the operations running. The board has also decided to temporarily suspend the operation at the Karachi based manufacturing facility.
Coverages
At Mar 24, EBITDA and FCFO’s were recorded at PKR 2,601mln (Mar-23: PKR 4,012mln) & PKR 2,143mln; (Mar-23: PKR 3,357mln) respectively. Steep increase in finance costs and loss reported in 9MFY24 resulted in lower coverages and Interest coverage deteriorated to 0.7x at Mar-24 (Mar-23: 1.4x) and Core &Total operating coverages declined to 0.3x (Mar-23: 0.9x).
Capitalization
At Mar-24, leveraging stood at ~62.1% and total debt was recorded at PKR 21.4 billion as opposed to PKR 23 billion at Mar-23 (Leveraging at Mar-23: 60%). Out of total debt, ~77% pertains to short-term borrowings.
 
 

Oct-24

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Amreli Steels Limited

rating scale

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Oct-24

www.pacra.com

Amreli Steels Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
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Oct-24

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