Karachi, August 19, 2022 (PPI-OT): ASTL: Higher tax and fuel price adjustment eroded earnings
Amreli Steels Limited (ASTL) posted a loss in 4QFY22 of Rs1.71/share, compared to an EPS of Rs1.49 in SPLY. This takes FY22 EPS to clock in at Rs4.46, -3% YoY. The company held its corporate briefing yesterday to discuss the quarter’s results and outlook.
Despite higher revenue, margins were -2ppt/-1ppt lower on a YoY/QoQ basis due to increase in grid rates, significant increase in scrap prices and rupee depreciation. PAT was lower due to higher finance cost and the one-time 10% super tax charge.
Going forward, we expect volumetric sales to remain dull in FY23 due to fiscal consolidation, resulting in a slowdown in construction activities. However, as macro clarity emerges, an improving demand outlook could provide ASTL the required room to pass on cost increases to consumers.
Super tax slashed profitability
Amreli Steels Limited (ASTL) posted a loss in 4QFY22 of Rs1.71/share, compared to an EPS of Rs1.49 in SPLY. This takes FY22 EPS to clock in at Rs4.46, -3% YoY. During the quarter, top-line expanded by 30% YoY mainly due to higher selling prices for rebars. This was however offset due to a decline in volumes which clocked in at 88k tons vs 105ktons in SPLY. Higher scrap prices, sharp rupee devaluation, electricity tariff hikes and significant fuel price adjustments for the month of May and June took a toll on quarter’s gross margins which dropped 2ppt/1ppt on a YoY/QoQ basis. Earnings were lower due to higher finance cost owing to an increase in short term borrowings and KIBOR rates. Tax expense was also higher at Rs510mn out of which Rs126mn was due to the 10% super tax charge while Rs383mn was related to the deferred tax adjustment. The company did not announce any dividend alongside the result.
Management guidance for FY23
Going forward, management expects volumetric sales during FY23 to decline by 6-10% in-line with expected decline in cement dispatches but also shared that it may be able to retain sales volumes by relaxing terms on credit sales in the local market. In such a scenario, annual sales for FY23 will likely remain flat at ~370k tons. The management expects 1QFY23 to be dull over lower demand but situation is expected to improve from 2QFY23 onward. ASTL has increased its share in the Southern market of late. The company operated at c. 61% capacity utilization during FY22. Management is of the view that finance cost will remain elevated during FY23 and will likely clock in around Rs4-4.2bn.
Management apprised that its non-ferrous business is expected to start contributing from FY24, the project has an estimated capex of around Rs500 – 600mn. LC approval from State Bank will take some time after which it will take around 9 months to complete.
Expected slowdown to restrain demand
Slowdown in global demand and rising inventories have been playing their part to keep international prices in check for steel scrap. Prices for most ferrous metals have been under pressure due to worries of tight monetary policies in developed economies and a possible slowdown in Europe and the US in the coming quarters.
Similarly, fiscal consolidation will likely slowdown construction activities in our market as well during FY23. Consequently, we expect the company to show a 10% YoY decline in volumetric sales. The likely dip in earnings for FY23 combined with uncertain near-term demand outlook is likely to restrain short term stock price performance. The company has also recently decreased rebar prices by Rs7,000/ton to remain competitive and protect its market share. However, as macro clarity emerges, an improving demand outlook could provide ASTL the required room to pass on cost increases to consumers.