Amreli Steels: New but Sold

Amreli Steels (ASTL) may be new to those investing in shares of listed companies, but considering it may be worth.  An analysis by AKD Securities has following observations:  1) strong volumetric growth post expansion of re-bars and billets capacity expected to come online by March next year, 2) cost efficiencies from vertically integrated process, 3) improving gross margins (GMs) owing to use of relatively more energy efficient plant, 4) a 5-year tax holiday on its new plant and 5) premium pricing.

Amreli Steels is a family owned business producing steel reinforcement bars (re-bars) that are used to support concrete structures. The management remains strong where recent efforts have resulted in strong earnings and revenue CAGR of 372% and 28% respectively. In line with robust anticipated demand growth Amreli’s management decided to expand its re-rolling/steel melting capacity by 300,000 tpa/200,000 tpa to 480,000 tpa/400,000 tpa.

The expansion (Capex: Rs3.4bn) will likely be financed through the IPO proceeds (Rs3.79 billion) and expected to come online by March’17. Though, the management expects the output to double in FY18, the brokerage house expects sales to go up by 40% as cheaper Chinese imports have created significant supply pressures.

Silverlining remains in the form of additional 15% regulatory duty levied on Chinese re-bars that will help ease pricing as well as competitive pressures. While downside risk remains limited as infrastructure projects account for 70% of Amreli’s existing sales that is unlikely to be substituted by imported re-bars due to logistical and quality issues.

The new re-rolling plant is relatively more energy efficient compared to its existing plant and it will be integrated with steel melting shop delivering further cost savings. Additionally, Amreli is expected to significantly increase its sales volume post-expansion as it is the largest contractor of CPEC projects. Lower scrap prices amid global commodities downturn is expected to result in higher GMs to sustain.

The domestic industry enjoys a relatively high degree of protection on account of higher import duties. While this provides an edge to the local industry in general, Amreli’s strong brand recognition also plays a key role in delivering value. In this regard, Amreli enjoys a distinct edge over its competitors due to: 1) premium pricing attributable to its superior product quality and 2) cost efficiencies owed to steel melting plant in place that allows it to produce its own steel billets from steel scrap.

According to 3QFY16 result, Amreli Steels posted a net profit of Rs372 million (Fully diluted EPS: Rs1.25), declining by 9%YoY from Rs409 million (Fully diluted EPS: Rs1.38). Lower earnings were primarily attributable to stumbling topline, down by 17%YoY). Stiff competition from Chinese re-bars import (in spite of recently levied 15% regulatory duty on re-bars import) was the major reason behind lower sales. On the contrary, finance cost took a nose dive by 68%YoY owing to swift debt repayments and lower interest rate environment.

Sequentially, earnings jumped 71%YoY led by relatively higher topline, lower admin and financial cost and higher other income. However, crimped up GMs owing to cut in re-bar prices on account of cheaper Chinese re-bars imports mitigated the above-mentioned positives. On a cumulative basis, 9MFY16 earnings grew by 59%YoY to Rs922 million from Rs580 million for 9MFY15. Stronger earnings were led by bolstered GMs and lower finance cost in spite of decline in topline.

The unprecedented increase in Chinese imports as per recent imports statistics expected to return to normal level as the government has recently increased regulatory duty on re-bars import by 15ppt to 30%. Besides, the recent rally in scrap prices (US$200/ton in March’16 to US$310/ton) has significantly raised Chinese re-bars prices (US$270/ton in March’16 to US$460/ton) shrinking the gap between locally manufactured re-bars prices and imported ones.

The company management expects demand to return to normal from FY17 and expects margins to sustain at 20% at least in the near term. The next checkpoint remains in the form of upcoming capacity expansion, which will increase the output ere we expect output by 40%.

Although import of steel re-bars from China remains a risk, infrastructure projects account for 70% of Amreli’s existing sales that is unlikely to be lost to imported re-bars due to logistical and quality issues. If at all there is any adverse impact on domestic industry, analysts expect a further increase in customs duty/regulatory duty or imposition of anti-dumping duty on steel re-bars import to address the concerns.



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