Pakistan Credit Rating Agency Limited (PACRA) has downgraded the ratings for Amreli Steels Limited (PSX: ASTL) from “BBB” to “BB” for long-term and from “A3” for short-term, while maintaining a negative outlook.
Amreli Steels is one of the largest producers of steel reinforcement bars, primarily manufacturing two products: steel billets and rebars, including Grade 60 Deformed Steel bars and Xtreme bars (G-500W).
As of FY23, the steel industry continues to face significant challenges, including low demand, PKR depreciation, high financial costs, record power rates, and soaring input costs. These pressures have placed many steel mills in a precarious situation, with several operating at reduced capacity and some on the brink of closure.
Amreli Steels has not been insulated from these economic pressures, experiencing a sharp decline in volumetric sales during FY24. Revenue fell by 15%, totaling approximately Rs39 billion, down from Rs45 billion in FY23.
Due to weak demand, the company has struggled to pass increased production costs onto consumers, resulting in gross margins halving to 6% in FY24 compared to 13% in FY23.
Furthermore, operating margins have turned negative, indicating severe financial strain. Amreli relies heavily on short-term borrowings for working capital and previously took long-term loans to expand production capacity amid rising demand in FY21.
The combination of negative operating margins, high finance costs, levies, and taxes has exacerbated Amreli’s fragile financial position, leading to a substantial net loss of PKR 6 billion.
The downgrade reflects the company’s deteriorating financial health and reduced ability to meet obligations promptly, alongside increased pressure on debt repayment in FY24.
Strategies previously announced, such as debt reprofiling, downsizing, asset sales, and equity partnerships, have yet to yield significant results.
Currently, Amreli is negotiating with financial institutions for comprehensive debt restructuring, with management optimistic about concluding these discussions by the end of the calendar year.
Successful implementation of this plan could positively impact the company’s ratings. The effectiveness of management’s strategies and the availability of support to address potential financial shortfalls will be crucial in determining future ratings.
