Aisha Steel Mills Limited

Background

Aisha Steel Mills Limited (PSX: ASL) is a steel manufacturing player in Pakistan, part of the Arif Habib group, incorporated in 2005. The company is in the business of manufacturing cold rolled coil (CRC) a type of steel which has undergone the cold rolling process. The company uses imported Hot Rolled Coils (HRC) to manufacture CRC, hailing a capacity of 220,000 tons every year. The CRC is used in a variety of industrial, engineering and manufacturing industries and is a key raw material for them.

The company uses Japanese and Austrian machinery for many of the production processes to ensure quality manufacturing of CRC. The company’s plant is located in the downstream industrial estate of Pakistan Steel, Bin Qasim, Karachi.

ASL has 17 exclusive dealers that supply CRC all over Pakistan. The company earlier had a strategic partnership with Mitsubishi Corporation to assist in and ensure seamless marketing, sales, and distribution of CRC. However, the partnership was discontinued during FY16 as the management decided to hire in-house sales and marketing teams.

The company reached highest capacity utilization during FY17 (95%), though it used to be less than 50 percent in FY13 and stood at 58 percent during FY14. In recent years, utilization has increased. Reaching optimum utilization, and seeing the expected demand for steel in the country increase, the company is undergoing a major expansion which would raise the capacity of production to 700,000 tons. This will set the tone for Aisha steel’s future and mark the company as a leading player in the flat rolled steel industry.

Shareholdings, expansion and modernization

Owned by the Arif Habib Group, more than 31 percent of the shares of ASL are held by Arif Equity while 18.6 percent of the shares are held by Arif Habib himself as at June 2017. Metal One Corporation, a Japanese company also holds 9.74 percent of ASL’s shares while another Japanese steel maker Universal Metal Corporation held 3.89 percent of the shares. The public held 18.85 percent of the shares as the company wrapped up FY17.

The company has a very ambitious expansion and modernization plan for which it has already done the preparatory work. The cost of the expansion comes to Rs5.4 billion which would increase CRC capacity to 450,000 tons and includes 250,000 tons of galvanized iron coils (GI). The expansion is set to come online in 18 months starting Oct-17. Of the total amount, Rs2.345 billion was raised through right issue—almost 147 million ordinary shares were issued. The rest of the financing Rs3.24 billion comes through debt.

Meanwhile, work is being done on the existing facilities to improve productivity. A new roll grinder was acquired from Germany to improve the quality of CRC being produced. An electrostatic oilier was added to improve corrosion protection by ensuring uniform layers of oil on both sides of the sheet service. A 25 ton capacity overhead crane was added in the dispatch bay to handle more volume. Two new cranes will be added during FY18 to improve material flow. A 25 ton fork lifter was added to ensure easy transportation of HRC and CRC coils. Meanwhile, the acid reservoir capacity was doubled and the storage area that held the HRC was optimized to handle additional volumes.

Steel market and ASL’s financial and operational performance

Steel is an important raw material in many industries and makes up for nearly half of the construction costs. With the Pakistani economy bolstered by infrastructure development, the sheer brick and mortar building has pushed the demand for construction materials significantly up, with steel at the forefront. Currently, the industry caters to about 60 percent of the local demand for CRC and 50 percent of the demand for GIs, with a major player in that area being International Steels (ISL). The rest is imported into the country. Major industry players are now undergoing expansion to meet this demand-supply gap in which ASL is bringing a substantial expansion. According to ASL’s own projections, the market size will go up between 1.3-1.5 million tons by FY20 and will hit 1.6 million tons by FY22.

But for ASL, the path has not been as smooth. Though expansion and modernization of the existing facilities is now in the works, the company was incurring losses up until FY16 and saw a major turnaround during FY17 when it hit a before-tax profit of Rs882 million. The loss in the preceding year stood at Rs192 million.

In many ways, FY17 was a year that ASL’s fortunes shifted. Its costs of production that had been really high came down—bringing gross margins up from 10 percent to 15 percent. But the improvements have been coming on since FY16. In the past, the company faced many technical issues related to the plant and equipment leading to high maintenance costs, which it has worked on to improve over the past two years. Capacity utilization rose from 58 percent to 89 percent between FY14 and FY16, ultimately reaching 95 percent in FY17.

Whereas plant and machinery were facing efficiency issues, the company was also cash strapped with high finance costs. Raw material costs were also eclipsing margins to a huge extent, since much of it was being imported. Raw material consumed as a share of cost of sales went up from 84 percent in FY15 to 90 percent in FY16; and coming slightly down to 89 percent in FY17.

Over the past two years though, the company has worked on several fronts. It is undergoing modernization and overhaul of its existing plant (see ‘Shareholdings, expansion and modernization’ above). Fruits of this labour have already started showing in terms of lower costs. It hired a new sales and marketing team to help boost sales. This has translated in higher capacity utilization since FY16. The company also built mechanical and electrical workshops to do repair and maintenance work in-house.

Risks, opportunities and outlook for ASL

There is no denying that ASL is on the right path. According to its own projections, it would hit nearly Rs70 billion in sales revenues by FY22, two years after the mega expansion of CRC and GI come through. The expansion also puts it on the map as the second biggest player in the industry for flat rolled products, next to ISL.

Meanwhile, the expansion would give scale to the company’s operations that would help bring down cost of manufacturing. The increase in equity and improving liquidity also bodes well for the company’s future outlook. Moreover, the modernization of a range of technology would help smoothen processes, bring down wastage and improve efficiency that is all great news for the production chain.

Demand on the other hand is holding strong. Pakistan’s crude steel consumption per capita stands at 37.5kg compared with global average of 224.4kg. But the expected growth in demand is 10 percent annually. Not only coming from infrastructure development, the complete overhaul in the communication and transport network—roads, rails and highways—but also from industrial and manufacturing sectors such as automotive (cars are expected to go up to 500,000 units), heavy engineering as well as light engineering.

On the competition front, the cheaper Chinese steel that was being dumped across the world—and in Pakistan as well—was curbed after the government slapped antidumping duties of 13.17 percent -19.04 percent and 6.09 percent- 40.47percent on imports of CRC and GI respectively. This made importing this steel from China and Ukraine significantly expensive. This has helped revive sales for ASL and other players in the CRC and GI business.

The government also has a regulatory duty in effect of 30 percent to provide further relief to local players. These tariff protections will play out well for local steel makers as they don’t face price point competition from Chinese suppliers anymore. Unless importers find other cheaper sources, local players can relax for a few years.

Being an importer of HRC, international prices remain a risk for the company given their substantial impact on margins. HRC prices have been on the increase of late. If China cuts down on its production as it may very well do given its recent concerns for the environment, global prices will come under pressure given China’s heavy influence as the world’s biggest steel maker.

Rising HRC prices will affect margins but if they decline, margins would improve. If CRC prices decline, the anti-dumping duty would still give a buffer to steel makers and will not pose too much of threat to local sales.

Though Aisha is a heavily leveraged company, with the new expansions that would give ASL a huge chunk of the market share, modernization, demand prospects and the company’s projections of annual turnover and profits post-expansion, one should be optimistic about the company’s future.

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Pattern of Shareholding (as on June 2017)


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Categories of Shareholders                          Share


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Directors and their spouse(s) and minor children   20.63%


Arif Habib                                         18.60%


Hasib Rehman                                        2.03%


Associated Companies, and related parties          45.21%


Arif Habib Equity                                  31.59%


Universal Metal Corporation, Japan                  3.89%


Metal One Corporation                               9.74%


Public Sector Companies                             0.16%


Banks, development finance institutions,


insurance, non-banking finance companies etc.       6.32%


Mutual Funds                                        3.58%


Public                                             18.85%


Others                                              5.24%


Total                                                100%


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