AGHA Steel Industries Ltd (ASIL) is all set to enter the Pakistan stock market.

It would be the third company to seek listing in this calendar year. Earlier, Organic Meat Company Ltd and TPL Trakker Ltd went public. Fewer than a dozen steel-producing companies are currently listed on the Pakistan Stock Exchange (PSX) as part of the engineering sector.

In its prospectus for the issue of shares, ASIL identified its key competitors as Mughal Iron and Steel Industries Ltd and Amreli Steel Ltd. ASIL must have given a hard thought to the timing of the public offering. With the government’s focus firmly on the construction industry, cement and steel stocks are currently trading at fabulous prices. Earlier, there was a beeline of prospective companies from various sectors that wanted to go public. But almost all of them put the plans on hold fearing undersubscription. The stock market plunged early in the year owing to the investors’ nervousness over the impact of the pandemic on the local and global economies.

The Agha family, which laid the foundations of a small foundry in the 1960s, currently holds the entire equity of the company. The sponsors’ interest in other sectors includes shipbreaking as they set up Abbas Shipbreaking Industries at Gadani in 1970. The family has also maintained its presence in the textile sector with Al-Abbas Fabrics that it set up in 1991. It is engaged in garment exports. The family also went into the denim business in 2003 by setting up Denim International.

Steel-maker aims to raise up to Rs5bn for capacity expansion in upcoming IPO

Total assets on the balance sheet of ASIL are Rs26 billion. The company has a composite unit of steel-melting and re-rolling in Karachi’s Port Qasim industrial area. The prospectus states that it is a key competitive advantage as many of the steel-makers in Pakistan have their re-rolling and melting facilities at different locations. This results in time lags and cost inefficiencies for them.

The company’s annual production capacity for rebars — grey steel bars used in construction — is 250,000 metric tons per annum. The management puts its market share at over three per cent in the prospectus. The upcoming issue of shares, for which no date has been notified yet, consists of 120 million shares. That will account for 20.83pc of the total post–initial public offering (IPO) paid-up capital of the company. The book building portion of the issue consists of 90m shares (75pc of the total issue) at the floor price of Rs30 per share (including the premium of Rs20). The general public will be offered 30m shares (25pc of the issue) at the strike price. According to current regulations, to be an eligible investor in book building, the bid amount has to be Rs2m or more.

At the floor price of Rs30 per share, the company hopes to raise Rs3.6bn. According to the listing rules, the floor price can rise to Rs42 per shares, which may generate Rs5bn. Post-IPO, the share capital of the company will increase to 576.1m shares from 456.1m with the stock held by the sponsors diluting to 66.62pc from 84.14pc pre-IPO.

In the offer for shares document, ASIL said it plans to utilise part of the IPO proceeds amounting to Rs3.6bn towards financing the Mi.Da rolling mill, which will “shorten the scrap-to-steel production cycle from days to a couple of hours”. It will increase the production capacity of rebars to 650,000 tonnes from 250,000 tonnes per annum. Proceeds will also be used for setting up an in-house air separation unit (ASU). The company stated that the total cost of the second phase of the expansion project will amount to a tall order of Rs7.04bn, which will be financed through the debt-to-equity ratio of 49:51. Besides the IPO proceeds of Rs3.6bn (51pc), the company will seek long-term debt of Rs1.74bn (25pc) and supplier’s credit for the Mi.Da plant to the tune of Rs1.71bn (24pc). The purchase of plant and machinery will consume Rs2.7bn, followed by working capital requirements of Rs1bn.

The figures provided in the prospectus show a profit after tax of Rs737m for the first half of 2019-20 on the net revenue of Rs7bn. Gross and operating margins stood at 24.3pc and 21.3pc, respectively. The key revenue driver for the company is the sale of rebars, which contributed to approximately 98pc to the top line for the last three years, providing the company with a market share of more than 3pc. More than 80pc clients of the company are institutional while the distribution network brings in the remaining 20pc sales. The prospectus states that the company has supplied steel to Neelum Jhelum Hydropower Project, Baharia Town Karachi, Karachi Super Highway M9, FWO Project for Turbat/Ormara and Sindh Engro Coal Mining Company Ltd.

Regarding the industry outlook, the company stated that the total steel demand in Pakistan was 7.1 million tonnes per year. It was expected to rise in the long-term owing to a number of large infrastructure projects, especially the China-Pakistan Economic Corridor (CPEC) and the Naya Pakistan Housing Scheme. The domestic steel sector can be categorised into two types. One, long steel, which consists of rebars, billets, blooms and wires etc. And two, flat steel, which is in the shape of hot-rolled coils, hot-dipped galvanised steel, cold-rolled coils and sheets etc. The country is among the lowest per-capita consumers of steel (about 43kg) as opposed to the regional average of 276kg and the global average of 214kg.

Among the listed potential risk factors are economic slowdown, raw material supply/price risk, Covid-19, capital market risk, regulatory risk, under-subscription risk, technological obsolescence risk, interest rate risk, foreign exchange risk and increased competition risk.

Published in Dawn, The Business and Finance Weekly, September 28th, 2020