Steel sector to post record profitability

Islamabad: FSL steel universe (Ex-AGHA) is likely to post a profit of Rs3.4 billion in the third quarter of the current financial year 2020-21.

It is likely to record profit due to higher volumes for both long and flat steel products and pricing power in the flat steel market amid a recovery in HRC-CRC margins.

Decline in finance cost due to 625bps rate cut and the start of price increase cycle for long steel manufacturers will also contribute to profitability along with some other factors.

Lower fixed cost contribution per unit due to enhanced utilization levels and increased contribution of export business in MUGHAL are other factors to record profit.

Enhanced pricing power in the flat steel market and close coordination between long steel manufacturers to pass on the impact of a hike in scrap cost would allow the FSL universe to post a profit of Rs3.4bn in 3QFY21.

Furthermore, FSL universe revenue is likely to increase by 57/12% YoY/QoQ in 3QFY21 due to increased volumes amid higher steel prices.

Its gross margins are also likely to increase by 6.5% YoY to 14.7% in 3QFY21 due to higher HRC-CRC margins for ISL (up 30% YoY), and greater contribution of copper exports in MUGHAL.

Change in pricing strategy by ASTL compared with ungraded players and lower fixed cost contribution are at higher utilization levels.

Lower imports by private traders due to volatility in international prices amid higher HRC-CRC margins put pricing power back to local flat steel manufacturers and allowed them to pass on the impact of higher input cost in a timely manner.

“We expect ISL to post EPS of Rs4.3 in 3QFY21 due to (1) higher volumes amid better retention prices and 29% YoY decline in finance cost, Foundation Securities said in a research report.

Higher copper exports amid better rebar retention prices will uplift MUGHAL profitability.

The foundation securities expected MUGHAL profitability to increase by 31x YoY due to higher margins in the export of copper ingots (LME copper prices up 50/17% YoY/QoQ) in 3QFY21, and better rebar retention prices, and (3) 32% YoY decline in finance cost.

ASTL

ASTL will report the highest ever EBITDA in 3QFY21. It is likely to post EPS of Rs1.8 (up 71% QoQ) in 3QFY21 as compared to loss Rs1.3/sh in 3QFY20. Company profitability would increase due to increased penetration in the north market and demand recovery in the south market by the private sector that would increase the company’s revenue by 53/24% YoY/QoQ in 3QFY21, (2) 44% YoY expected decline in finance cost is given lower working capital requirement amid lower interest rates and (3) decline in provision for expected credit loss.

Increased contribution of the north market will restrict AGHA margins. AGHA margins are likely to decline QoQ in 3QFY21 due to its strategy to establish a footprint in the north market before the COD of the new rebar mill. Furthermore, on a sequential basis company’s profitability is likely to decline by 12% QoQ due to lower other income and higher finance cost.

We have a positive stance towards the sector given listed players’ greater financial muscle as compared to ungraded players in the rebar segment, and price increase cycle in the rebar market, Foundation Securities said.