INCORPORATED in 2004, Dost Steels Limited was then envisioned to be the country’s largest re-bar rolling mill with capacity of 350,000 tonnes per annum.

DSL’s product had the distinction of being ’seismic friendly steel’ which was thought to have a big market due to sudden increase in seismic activity in the region.

“Unfortunately, adverse geopolitical conditions and security situation in the country, together with the 2008 financial crisis caused delays in engineering, procurement and construction (EPC) contractor timeline,” says a steel sector analyst.

‘The company requires capital injection for completion and hot commissioning of the plant under a restructuring and rehabilitation plan approved by the board and the syndicate lenders’

One thing led to the other. The delays in erection and cost over-runs forced the company to take on unsustainable levels of debt. Lenders claims ultimately dried up the company’s working capital and credit lines.

But for all that investors in DSL have continued to hold hopes high. The company was listed at the Karachi Stock Exchange on Nov 26, 2007. The share of the par value of Rs10 is still trading at the market at a premium of 80pc—the highest price in past six months.

Last Wednesday, its board announced right issue at 368pc at Rs4.50. It spurred investors to buying with the Dost stock gaining Re 0.51 to close at Rs18.22 with trading in a sizeable 1.3m shares.

Explaining the purpose of right shares, the management says: “The company requires capital injection for completion and hot commissioning of the plant under a restructuring and rehabilitation plan approved by the board and the syndicate lenders of the company.”.

A DSL official affirmed: “Once the commercial operations starts, DSL will be the only re-bar and re-rolling mill in northern region to have a state of the art plant capable of manufacturing international standard seismic compliant re-bars”.

‘Individuals’ hold 99pc of the company’s paid-up shares with 61.4pc of all issued shares in the hands of sponsors and family. The sponsors of Dost group have their presence in the textile spinning and gelatine manufacturing sectors.

“The company is currently in talks with its creditors to resolve working capital issues by restructuring debt. Once an agreement is signed between the company and lenders, DSL will finally be able to complete the plant and begin commercial operations”, says a sector watcher.

The directors have scheduled an extraordinary general meeting to resolve those issues. Research analysts Adnan Sami Sheikh and Fahad Rauf at brokerage Taurus Securities bracket the Dost product among ‘long steel’ which primarily consists of steel used for construction purposes, i.e reinforcement bars, sections, billets, blooms and wire-rods.

The latest accounts of the DSL for the nine-months ended Mar 31, reveals loss after tax amounting to Rs23m, which carries the accumulated losses to Rs490m. With the paid-up capital at Rs675m, the equity in the black is Rs184m. On March 31, DSL held Rs2.44bn in total assets. The company’s CEO Jamal Iftakhar assured shareholders in director’s report signed on April 26: “Keeping in view the country’s existing annual demand of 6.5m tonnes plus and upcoming infrastructure projects and industrial undertaking related to China Pakistan Economic Corridor (CPEC), the company is entering a takeoff position to capture a fair portion of steel sector’s canvas soon after its restructuring process.”

On the auditors comment over the preparation of accounts on ‘going concern basis’, the CEO says: “Due to strong chances of success of the current plans (of restructuring), the financial statements are prepared on the basis of going concern assumptions.

World Steel Association estimates Pakistan’s apparent per capita crude steel use at 29.4kg. “This is much lower than figures of India, Myanmar and Sri Lanka at 65.0kg; 43.4kg and 35.4kg, respectively, and a world average of 233.7kg”, say analysts Adnan and Fahad of Taurus Securities. They observe that the Pakistan steel industry is highly fragmented, comprising of over 330 companies with roughly 173 melting furnaces (based on PSMA members list) and 158 rolling mills (based on PSRMA members list).

However, there are only eight companies which have opted to get listed at the Pakistan Stock Exchange. Although standardised data is not available, industry experts believe Pakistan steel demand in 2015 was approximately 7 to 8m tonnes. The country meets its demand shortfall through imports, with flat products being the major portion of imports. While China has pushed the global steel industry near the brink of collapse, Pakistan’s steel sector is set to benefit from lower prices and a host of upcoming infrastructure development and housing projects.

Cement and steel sectors are outperforming at the stock market. Cement dispatches are forecast to grow at CAGR of 6pc over the next three years. This bodes well for the steel sector since experts suggest that for every 5 to 6 tonnes of cement, one tonne steel is used in construction.

Further, around 68pc of the PSDP budget has been already released, steel demand growth looks robust. Spur in residential construction due to severe housing shortage (8m units as per SBP data) could give boost to cement and steel demand. And finally the CPEC projects worth $46bn which would include construction of highways and pipelines. It is the foremost reason that the cement and steel stocks have caught the investors’ fancy at the equity market.

Published in Dawn, Business & Finance weekly, May 30th, 2016