Industrial: Building & Construction Materials

Pakistan
August 09, 2017
Research Entity Pakistan - 028

US$ 0.7bn 1.37% 3.4mn

Market Cap Index Weightage Avg. Daily Volume

www.jamapunji.pk

Underweight Marketweight Overweight Pakistan Flat Steel Sector

Booming on Spending Revolution
Key Themes We initiate coverage on Pakistan Flat Steels with an Overweight
Pakistan Flat Steel Sector is poised to become a stance. Flat steel manufacturers are expected to do particularly
dominant force owing to: 1) robust domestic well with expansions planned to cater booming domestic
demand growth, 2) expansions providing room to demand arising from robust growth outlook for downstream
drive out imports, and 3) stronger realized spreads
amidst increased protectionism. sectors including autos, electronics and construction.
Anti-dumping duties levied on Chinese flat steel imports have
turned the tables in favor of domestic manufacturers, providing
a sigh of relief against the threat of cheaper dumped imports.
Implications We expect Flat Steel Stocks to offer an average upside of ~38%
backed by robust earnings growth (3-year / 5-year forward
We have an Overweight stance on Flat Steel Sector
due to impressive earnings growth outlook CAGR of 34% / 24%).
stemming from rising demand, increased market With our Jun-18 PTs of PKR178/share for ISL and PKR30/share
share, and improved GM. for ASL, the stocks offer total return of 38% and 36%,
respectively.
Demand Boom Likely to Sustain Momentum: Domestic demand for flat steel
products has been growing at a robust pace (>10% p.a.) led by strong growth
witnessed in downstream sectors including autos, electronics and construction.
What do we think? These sectors have seen particular surge in demand led by rising real income,
Stock Rating Price Target increase in consumerism and ever-growing government spending to address
ISL Overweight 178 infrastructure shortfall. As such, Pakistans crude steel consumption per capita
ASL Overweight 30 remains relatively low at 37.5kg compared with global average of 224.4kg, with
impressive growth rate (3-year historical CAGR of 21%) in recent years expected
to sustain at least in the medium term. As such, we expect future flat steel
Valuation
demand to grow at a rate of 10% p.a.
FY16A FY17E FY18F FY19F Local Expansions to Replace Imports Market Share: In the backdrop of
PAT Growth n.m. 452% 32% 42% booming domestic demand and significant gap present in domestic
PE 94.1 17.0 12.9 9.1 demand/production, flat steel manufacturers have announced expansions in
P/B 7.6 4.1 3.3 2.6 both CRC (450k tpa / 480k tpa by ISL / ASL) and GC (250k tpa by ASL) to
Div Yield 0.7% 1.8% 2.6% 4.4% expand their market share. In this regard, we expect CRC / GC market share to
increase from 51% / 48% in FY16 to 73% / 79% by FY20 when the planned
expansions start commercial operations.
Anti-Dumping Duties to Provide Meaningful Protection: The flat steel
manufacturers are expected to significantly benefit from recently imposed anti-
dumping duties levied on Chinese flat steel products. In this regard, Competition
Commission of Pakistan (CCP) has imposed anti-dumping duties of 13.17%-
19.04% and 6.09%-40.47% on imports of CRC and GC from China/Ukraine,
respectively. As a result, realized spreads of CRC-HRC / GC- HRC jumped from
USD92 / USD176 per ton in FY16 to estimated USD163 / USD211 per ton in FY17.
Going forward, we expect realized CRC-HRC / GC-HRC spreads to stay firm at
USD150 / USD230 per ton owing to increased cost of CRC and GC imports post
the levy of anti-dumping duties. In this backdrop, flat steel manufacturers would
be relatively resilient to falling international prices of CRC and GC whereas any
decline in global HRC prices will help local manufacturers realize higher primary
margins.
Valuation: Driven by a strong pickup in private consumption, flat steel stocks
have rallied 223% since Jun-16, however they still remain undervalued in our
view. We opine that relatively premium PE multiples of 12.9x / 9.1x for FY18F /
FY19F are justified on the back of 1) expectation of 3-year / 5-year forward
earnings CAGR of 34% / 24%, and 2) anticipated stability of spreads owing to
protection provided by anti-dumping duties. Our Jun-18 PTs of PKR178/share
for ISL and PKR30/share for ASL imply a total return of 38% and 36%,
respectively.
Elixir Research Department
Sharoon Ahmad
T: +92 21 111 354 947, Ext.3118, E: sharoon.ahmad@elixirsec.com

Disclosures 1
Please refer to the important disclosures at the back of this report.
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Table of Contents
Demand Boom Likely to Sustain Momentum 03
Local Expansions to Replace Imports Market Share 07
Anti-Dumping Duties to Provide Meaningful Protection 09
Valuation 11
Risks 12
Flat Steel Products & Applications 13
Flat Steel Value Chain 17
International Steels Limited: Company Snapshot 19
International Steels Limited: Earnings Sensitivity 22
International Steels Limited: Financial Summary 23
International Steels Limited: Key Financial Ratios & Valuation 24
Aisha Steels Limited: Company Snapshot 25
Aisha Steels Limited: Earnings Sensitivity 28
Aisha Steels Limited: Financial Summary 29
Aisha Steels Limited: Key Financial Ratios & Valuation 30
Glossary 31

Disclosures
Please refer to the important disclosures at the back of this report. 2
Industrial: Building & Construction Materials
Pakistan
August 09, 2017
Domestic demand for flat steel
products has been growing at a
robust pace (>10% p.a.).
Rising incomes have been driving
consumerism which is the upstream
sector in flat steel value chain.
Chart 1: PKR Income/Capita on the Rise
Source: Ministry of Finance (MoF), Elixir Research
Disclosures
Please refer to the important disclosures at the back of this report.
Demand Boom Likely to Sustain Momentum
Domestic demand for flat steel products has been growing at a robust pace (>10% p.a.) led by
strong growth witnessed in downstream sectors including autos, electronics and construction.
These sectors have seen particular surge in demand led by rising real income, increase in
consumerism and ever-growing government spending to address infrastructure shortfall. As
such, Pakistans crude steel consumption per capita remains relatively low at 37.5kg compared
with global average of 224.4kg, with impressive growth rate (3-year historical CAGR of 21%)
in recent years expected to sustain at least in the medium term. We expect future flat steel
domestic demand to grow at a rate of 10% p.a.
Domestic Consumption Growth Outpacing Global Consumption
Growth
The domestic demand for steel in Pakistan has grown at a robust pace with 5-year (FY10-15)
CAGR of 26.7% vs. global average growth of 2.8% during the same period. The domestic
demand has been led by: 1) rising incomes as evidenced through uptick in GDP/capita from
USD1,026 in FY09 to USD1,629 in FY17 and 2) shift in consumption patterns. Pakistans low
steel consumption per capita of 37.5kg vs. the global average of 224.4kg indicates a significant
potential for growth in domestic demand for steel. The flat steel segment has rather held a
relatively smaller pie ~14% (flat steel consumption of 1.0mn ton vs. total steel consumption
of 7.1mn tons in FY15) in total steel consumption where the micro level demand has mainly
been driven by surging demand from tubular steel, automotive, electronics and construction
sectors.
Chart 2: PKR Depreciation Spurts Keeping $ Income/Capita Growth Volatile
Source: Ministry of Finance (MoF), Elixir Research
3
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August 09, 2017

Chart 3: Steel Consumption per Capita (kg)

Source: World Steel Association

Rising incomes have propelled
motorcycle sales in particular.
Rising Incomes Leading Automotive Sales; Automotive Demand
Can Provide Further Thrust
Automotive sales have vastly improved due to rising income effect. Motorcycle parts have
remained one of the main demand drivers for flat steel sales. In this regards, motorcycle sales
have grown at a 2-year (FY15-17) CAGR of 27% which has boosted demand for flat steels. While
we expect demand growth for motorcycles to normalize, it is still likely to stay well within double
digits.

Chart 4: Motorcycle Demand Growing at a Swift Pace Chart 5: Demand for Local Car Slowed Down Recently Likely Due to Imports

Source: Pakistan Automotive Manufacturers Association (PAMA), Elixir Research Source: Pakistan Automotive Manufacturers Association (PAMA), Elixir Research

While automobile companies continue to import steel body sheets, producing specified
quality product can further add to demand for flat steels. Besides different automotive
companies including Kia, Hyundai, Renault and Audi are in plans to start assembling
operations in Pakistan, which may provide additional demand stream for flat steels in future.

Disclosures
Please refer to the important disclosures at the back of this report. 4
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Electronic sales have been the second Consumerism Driving Electronics Sales
fastest growing sector (+16.2% YoY in
11MFY17) in Large Scale
Electronic sales have also benefited from rising income effect as well as shift in consumption
Manufacturing (LSM) Industries patterns where consumer demand for electronics such as refrigerators, deep freezers, air-
falling just behind Steel Industry conditioners, and electric fans have grown at a steady pace with 5-year (FY11-16) CAGR of
(+20.0% YoY in 11MFY17).
8%, 3%, 9%, and 1%, respectively. The local manufacturers including Dawlance, Pak Elektron,
Haier, Orient, and Singer etc. have seen rising market share due to penetration into middle
class due to relatively cheaper product offerings. This trend of greater market share and
robust domestic demand growth is expected to continue over the medium term owing to
persisting factors.

Chart 6: Refrigerator Sales Have Picked Pace in FY17 Chart 7: Deep Freezers Demand Growth Remains Remarkable

Source: Pakistan Bureau of Statistics (PBS), Elixir Research Source: Pakistan Bureau of Statistics (PBS), Elixir Research

Chart 8: Air Conditioners Demand Growth Remains Steady Chart 9: Electric Fans Demand Lifted After Flatter Sales in Recent Years

Source: Pakistan Bureau of Statistics (PBS), Elixir Research Source: Pakistan Bureau of Statistics (PBS), Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 5
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Host of Factors Keeping Construction Activity Strong

Private Sector Credit & PSDP
spending growth has driven real
construction activity.
Construction sector development has remained robust in recent years (depicted by its proxy
i.e. domestic cement demand) owing to 1) rising incomes (PKR and USD income per capita
5-year (FY12-17) CAGR of 7.7% and 4.3%, respectively), 2) increase in construction related
private sector credit (at all-time high of PKR199bn in Jun-17 and record growth of 37% YoY)
and 3) increased Public Sector Development Program (PSDP) spending (5-year (FY12-17)
CAGR of 21%). Real construction activity (at constant prices) has further picked pace (5-year
(FY12-17) CAGR of 7.5%) due to private housing development taking off in recent years.
The boom in the construction space is expected to remain robust in upcoming years due to
demand emanating from above mentioned factors as well as from materialization of China
Pakistan Economic Corridor (CPEC) projects. Moreover, the biggest potential exists in the
form of housing backlog standing at 10mn units, where housing demand is growing at a rate
of 0.7mn units per annum. Thus, flat steel demand is expected to remain robust where
tapping potential of housing can result in a super-cycle.

Chart 10: Credit Loans for Construction Growing at Record Pace Chart 11: Increased Budget and Utilization has Improved PSDP Spending

Source: State Bank of Pakistan (SBP), Elixir Research Source: Ministry of Planning, Development & Reform (MPD&R), Elixir Research

Chart 12: Driving Construction Activity

Source: Ministry of Finance (MoF), Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 6
Industrial: Building & Construction Materials
Pakistan
August 09, 2017
CRC / GC capacity expansions of 930k
tpa / 250k tpa will take CRC / GC
capacity to 712k tpa / 1,700k tpa by
FY19 end.
Chart 13: CRC Utilization to Drop Due to Significant Capacity Addition
Source: Company Accounts, Elixir Research
Disclosures
Please refer to the important disclosures at the back of this report.
Local Expansions to Replace Imports
Market Share
In the backdrop of booming domestic demand and significant gap present in domestic
demand/production, flat steel manufacturers have announced expansions in both CRC (450k
tpa / 480k tpa by ISL / ASL) and GC (250k tpa by ASL) to expand their market shares. In this
regard, we expect CRC / GC market share of domestic products to increase from 51% / 48% in
FY16 to 73% / 79% by FY20 when the planned expansions start commercial operations.
Planned Expansions to Take Imports Head On
Both International Steels Limited (ISL) and Aisha Steel Mills Limited (ASL) have expansions
in pipeline that are expected to come online during FY19. ISLs 312k tpa Galvanized Coil (GC)
capacity came online in Aug-15 which allowed the company to grow dispatches by 41% YoY
to 240k tons in FY16. Though ISLs GC production remains constrained by Cold Roll Coil
(CRC) capacity (GC capacity of 462k tpa vs. CRC capacity of 550k tpa), its upcoming CRC
expansion of 450k tpa (expected COD: 4QFY18) would be more than enough to complement
its GC capacity.
Following suit, ASL has announced expansion of 480k / 250k tpa of CRC / GC capacity, where
the management expects them to come online by 4QFY18 / 2QFY19. However, we have
incorporated these expansions with a lag of 6 months, resulting in expected CODs in 2QFY19
/ 4QFY19 for CRC / GC.
We anticipate overall CRC / GC utilization levels to reach 72% / 82% post-expansion
compared with 71% / 52% in FY16. As such, we expect product mix to shift to 48% of GC by
FY20 from 44% of GC in FY16. The share of domestic dispatches of CRC / GC is projected to
improve to 73% / 79% in by FY20 from 51% / 48% in FY16. While we have remained
conservative in our assumptions, there is a strong likelihood that the local manufacturers
would likely be able to wipe out imports in the presence of strong anti-dumping duties.
Chart 14: GC Utilization to Go Up Backed by CRC Expansion
Source: Company Accounts, Elixir Research
7
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August 09, 2017
Chart 15: CRC Market Share to be Led by ISL
Source: Company Accounts, Elixir Research
USD10/ton decline in CRC-HRC / GC-
HRC realized spreads (due to price
undercutting) may lower FY18
earnings by 5.3% / 5.0%.
Disclosures
Please refer to the important disclosures at the back of this report.
Chart 16: GC Market Share of Local Players to be Driven Up by Expansions
Source: Company Accounts, Elixir Research
Risks Exist With Regards to Overcapacity
While we have remained conservative in our assumption of increased market share, there is
a risk emanating from overcapacity, particularly in CRC. In this regard, CRCs capacity
utilization is expected to fall to 72% in FY19 from 98% in FY18 in spite of 38% YoY growth in
flat steel dispatches. Despite duopoly structure of local flat steel industry (enjoying greater
pricing power due to industry concentration), oversupply can create pricing pressures and
drive margins down. We would like to flag the risk that revival of Pakistan Steel Mills
(currently shut down due to losses and working capital issues) can create further oversupply
pressures. In this regard, we estimate that every USD10/ton decline in CRC-HRC / GC-HRC
realized spreads (due to price undercutting) may lower FY18 earnings by 5.3% / 5.0%.
8
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August 09, 2017
CCP has levied anti-dumping duties of
13.17%-19.04% and 6.09%-40.47%
on Chinese / Ukrainian imports of
CRC and GC, respectively effective
from Jan-17 / Feb-17 for 5 years.
Local realized spreads diverging from
international spreads due to anti-
dumping duties.
Disclosures
Please refer to the important disclosures at the back of this report.
Anti-Dumping Duties to Provide Meaningful
Protection
The flat steel manufacturers are expected to significantly benefit from recently imposed anti-
dumping duties levied on Chinese flat steel products. In this regard, Competition Commission
of Pakistan (CCP) has imposed anti-dumping duties of 13.17%-19.04% and 6.09%-40.47% on
imports of CRC and GC from China/Ukraine, respectively. As a result, realized spreads of CRC-
HRC / GC- HRC jumped from USD92 / USD176 per ton in FY16 to estimated USD163 /
USD211 per ton in FY17. Going forward, we expect realized CRC-HRC / GC-HRC spreads to
stay firm at USD150 / USD230 per ton owing to increased cost of CRC and GC imports post
the levy of anti-dumping duties. In this backdrop, flat steel manufacturers would be relatively
resilient to falling international prices of CRC and GC whereas any decline in global HRC prices
will help local manufacturers realize higher primary margins.
Case of Anti-Dumping Duties
In recent years, the realized average spreads of CRC remained relatively low compared with
international spreads owing to dumped imports. The case was filed by local manufacturers
with Competition Commission of Pakistan (CCP) against the dumped imports from China /
Ukraine. After investigating, CCP rightly handed anti-dumping duties of 13.17%-19.04% and
6.09%-40.47% on Chinese / Ukrainian imports of CRC and GC, respectively effective from
Jan-17 / Feb-17 for 5 years.
Anti-Dumping Duties
CRC GC
China China
Shougang Casey Steel Company Limited 19.04% Ansteel 40.47%
Shougang Jingtang United Iron & Steel Co. Limited 15.93% Bengang 9.13%
Beijing Shougang Cold Rolling Company Limited 12.02% HBIS 13.31%
Handan Iron & Steel Group Han-Bao Co. Limited 8.31% Ma Steel 6.09%
Maanshan Iron & Steel Company Limited 17.69% All others 40.47%
All others 19.04%
Ukraine
Zaporizhstal Integrated Iron-and-Steel Works 18.92%
Ilyich Iron and Steel Works of Mariupol 19.04%
All others 19.04%
Source: National Tariff Commission (NTC)
Local Spreads to Remain Relatively Stable
In the backdrop of anti-dumping duties, local manufacturers raised CRC / GC prices
relatively more than the recent increase in HRC prices (since Jun-16). This also allowed local
manufacturers to weather recent slide in international CRC-HRC / GC-HRC spreads, which
declined from USD121 / USD171 per ton in Jan-17 to USD68 / USD152 ton in global markets.
While realized CRC-HRC / GC-HRC spreads are expected to have averaged USD163 / USD211
per ton during FY17, we have assumed them to be USD150 /USD 230 per ton in FY18 and
onwards owing to increased cost of CRC and GC imports post the levy of anti-dumping duties.
In this backdrop, flat steel manufacturers would be relatively resilient to falling international
prices of CRC and GC whereas any decline in global HRC prices will help local manufacturers
realize higher primary margins.
9
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August 09, 2017

Chart 17: Realized Spreads and International Spreads at a Greater Variance Chart 18: GC-HRC Spreads Differential Relatively Lower

Source: Company Accounts, Bloomberg, Elixir Research Source: Company Accounts, Bloomberg, Elixir Research

Chart 19: International CRC-HRC Spreads Below Historical Average Chart 20: International GC-HRC Spreads Remain Much More Stable

Source: Bloomberg, Elixir Research Source: Bloomberg, Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 10
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Valuation
Driven by a strong pickup in private consumption, flat steel stocks have rallied 223% since
Jun-16, however they still remain undervalued in our view. We opine that relatively premium
PE multiples of 12.9x / 9.1x for FY18F / FY19F are justified on the back of 1) expectation of 3-
year / 5-year forward earnings CAGR of 34% / 24%, and 2) anticipated stability of spreads
owing to protection provided by anti-dumping duties. Our Jun-18 PTs of PKR178/share for
ISL and PKR30/share for ASL imply a total return of 38% and 36%, respectively.

Impressive Rally Backed by Turnaround in Earnings

The flat steel stocks have rallied 250% since Jun-16 led by turnaround in earnings on the back
of improving margins, where the latter has been attributable to increased protectionism in
the face of anti-dumping duties. The flat steels trade now at FY18F / FY19F PE of 12.9x / 9.1x.
We believe that premium multiples are reflective of stronger earnings growth with estimated
3-year (FY17-FY20) / 5-year (FY17-22) CAGR projected at 34% / 24%. The latter is expected
to be led by: 1) rising market share with the help of expansions, 2) stable spreads owing to
protection provided by anti-dumping duties, and 3) and improving margins backed by shift
in product mix towards high margin GC.

Relative Valuation
Name Ticker PE Dividend Yield EV/EBITDA ROE
Pakistan
International Steels Ltd* ISL PA 11.5 3.5% 8.0 42.8%
Aisha Steel Mills Ltd* ASL PA 20.8 0.0% 11.7 9.8%
Australia
Bluescope Steel Ltd BSL AU 12.0 1.1% 5.9 12.2%
China
China Oriental Group Co Ltd 581 HK 4.1 5.9% 3.2
India
Steel Authority Of India SAIL IN 12.0 1.9% 8.4 -0.3%
JSW Steel Ltd JSTL IN 11.1 0.8% 6.7 16.3%
Tata Steel Ltd TATA IN 9.8 1.5% 6.7 14.2%
Jindal Steel & Power Ltd JSP IN 16.6 0.0% 6.5 -2.8%
Japan
Osaka Steel Co Ltd 5449 JP 15.2 1.7% 9.0 3.9%
Sanyo Special Steel Co Ltd 5481 JP 10.7 2.2% 5.6 7.3%
Yamato Kogyo Co Ltd 5444 JP 14.1 1.7% 6.9 4.5%
Kyoei Steel Ltd 5440 JP 12.5 1.9% 5.0 3.5%
Nippon Steel & Sumitomo Meta 5401 JP 10.9 2.2% 7.8 6.9%
Aichi Steel Corp 5482 JP 10.6 2.1% 4.5 5.4%
Kobe Steel Ltd 5406 JP 11.8 1.4% 5.5 4.5%
Jfe Holdings Inc 5411 JP 11.0 1.9% 7.2 5.2%
Malaysia
Ann Joo Resources Bhd AJR MK 8.0 4.5% 6.9 17.1%
Lion Industries Corp Bhd LLB MK 10.2 0.9% 3.2 4.2%
South Korea
Hyundai Steel Co 004020 KS 8.1 1.3% 6.1 5.8%
Seah Besteel Corp 001430 KS 9.5 2.5% 6.4 7.1%
Dongkuk Steel Mill Co Ltd 001230 KS 11.7 1.0% 8.3 5.2%
Posco 005490 KS 10.2 2.5% 5.8 6.3%
Taiwan
Feng Hsin Steel Co Ltd 2015 TT 12.6 6.8% 7.2
Tung Ho Steel Enterprise Cor 2006 TT 10.6 7.1% 7.9
China Steel Corp 2002 TT 19.3 3.9% 10.1 6.5%
Source: Bloomberg
*Elixir Estimates

Disclosures
Please refer to the important disclosures at the back of this report. 11
 Industrial: Building & Construction Materials
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August 09, 2017

Risks
Unfavorable Ruling Against Anti-Dumping Duties: Anti-dumping duties levied on
flat steel products were challenged by local importers in Lahore High Court (LHC).
Though the courts decision came in favor of local manufacturers, there remains a
possible risk to industrys protectionism.

Increase in Dumped Imports from Russia: The recently imposed anti-dumping

duties are applicable on Chinese and Ukrainian imports only. Thus Russian dumping
flags a risk that the dumped imports may be also be channeled from other countries in
the wake of premium margins in Pakistan. Currently we project imports to account for
27%-46% / 21%-40% of total consumption of CRC / GC over FY17-FY20, where any
increase in imports may pose as downside risk to our offtake assumptions for ASL and
ISL.

Delay in Expansions: We have assumed ISLs CRC / ASLs CRC / ASLs GC

expansions to come online by 4QFY18 / 2QFY19 / 4QFY19 (incorporating a
conservative delay of up to 6 month over and above ASLs guidance). However any
further delays are likely to delay earnings growth as it would limit output (currently
constrained by high capacity utilization), besides limiting margins due to continuation
of existing product mix weighted by lower margin CRC sales.

Lower PSDP Utilization & Delay in CPEC Projects: Increase in fiscal deficit may
reduce PSDP utilization, thus, translating into a risk of slower construction activity.
Besides, delay in execution of CPEC projects may further diminish growth prospects.

Price War May Erode Margins: While the local players have so far operated in
harmony, however there is always a risk of price war in an oversupplied industry. In
this regard, we anticipate industry to run into losses if the domestic realized margins
converge towards international margins.

Increase in Interest Rates as the Companies are Heavily Leveraged: The industry
is heavily leveraged as they have taken significant debt to finance their expansions. In
this regard, interest rate reversal or any external shocks for that matter may greatly
increase financing costs. We have incorporated interest rate hikes of 75bps over CY18.
A further increase of 100bps (over and above our assumed interest rate trajectory) will
cause an erosion of 1.1% in FY18E earnings.

Disclosures
Please refer to the important disclosures at the back of this report. 12
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Flat Steel Products & Applications

Listed Steel Space in Pakistan

Long Flat Tubular

Amreli Steel (ASTL)

Crescent Steel (CSAP)
Mughal Steel (MUGHAL) International Steel (ISL)
Huffaz Seamless (HSPI)
Ittefaq Iron (ITTEFAQ)
Aisha Steel (ASL)
International Industries (INIIL)
Dost Steel (DSL)

Flat steel products marketed by local companies include Cold Rolled Coils (CRC) and
Galvanized Coils (GC). Currently, ISL markets both products while ASL is adding GC capacity
to expand its existing portfolio of CRC.

HRC (Dull Surface) CRC (Shiny Surface) GC (Shiny & Polished Surface)

Disclosures
Please refer to the important disclosures at the back of this report. 13
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August 09, 2017

CRCs Applications
Automobile Drum Home Appliances Electrical Appliances Construction Telecom Others
Motor-Cycle Frames Oil Drums Refrigerators Ceiling Lights Steel Roofs & Walls Telecom Towers Furniture
Fenders Lube Drums Deep Freezers Tube Lights Steel Racks Shelters Tubes
Mufflers Food Grade Drums Air Conditioners Ceiling Fans Structural Members Filters
Chain Covers Washing Machines Bracket Fans
Fuel Tanks Exhaust Fans
Rims
Seat Pans
Shock Covers
Precision Tubes
Auto Door Panels
Source: ISL Website

GCs Applications
Construction Electrical Appliances Automotive Domestic Appliances Others
Cladding / Sliding Washing Machines Doors Water Tanks Containers
Roofing Gas Ovens Fenders Trunks Packaging
Building Accessories Microwave Ovens Heat Insulators Canisters Furniture
Sliding Shutters Refrigerators Air Cleaners Ducting Computer Peripherals
Doors Freezers Air Conditioners Water Coolers Road Signs
Partitions Coolers Ice Boxes Bus Body
Canopies Elevators Geysers Storage Bins
False Ceilings Vending Machines Bill Boards
Pre-Fabricated Buildings Grillers
Sandwich Panels Toasters
HVAC (Heating, Ventilation & AC ducting) Air Conditioners
Source: ISL Website

Disclosures
Please refer to the important disclosures at the back of this report. 14
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August 09, 2017

Select Auto Parts Produced from Flat Steel

Frame Fender Muffler

Rim Fuel Tank Chain Cover

Shock Cover Door Panel Air Filter

Disclosures
Please refer to the important disclosures at the back of this report. 15
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August 09, 2017

Select Construction Related Articles Produced from Flat Steel

False Ceiling AC Ducting Partition

Rack Canopy Cladding

Roofing Sliding Shutter Pre-Fabricated Building

Disclosures
Please refer to the important disclosures at the back of this report. 16
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Flat Steel Value Chain

The value chain of flat steel products traces back to iron ore which is rich in iron oxide. Other
basic raw materials include limestone (calcium carbonate) and coke (~90% carbon).
Limestone is used for removing impurities (silica) from iron ore while coke (produced by
heating coal in the absence of air) is used to reduce iron oxide to iron. Following are the stages
of value addition in flat steel chain:

Iron & Steel Making

In the first stage of value chain, iron ore, limestone, and coke are fed into blast furnace to
produce pig iron (containing 3.5-4.5% carbon). Molten pig iron is mixed with varying
quantities of alloys (to produce different grades of steel), which is decarburized (carbon is
reduced by reacting with oxygen) in Basic Oxygen Furnace. The refined steel is then processed
through a continuous casting machine to produce steel slabs (~8-9 inch thick), which are
further grinded to remove surface defects.

Source: Elixir Research

Hot Rolling
The steel slab is reheated at high temperatures which is then rolled into HRC (~1 inch thick
sheet).
Cold Rolling
HRC is cleaned through pickling (washing with hydrochloric acid) to remove the black oxide
scale, which is then cold rolled to reduce their thickness. The coil is passed through
electrolytic cleaning system for removal of cold rolling lubricant. The coil is annealed
(heated and cooled) to remove brittleness and then temper rolled/skin passed (light
pressure applied to improve the flatness and achieve specified surface finish). The coil is
passed through recoiling line to further adjust width and weight of the CRC.

Disclosures
Please refer to the important disclosures at the back of this report. 17
 Industrial: Building & Construction Materials
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August 09, 2017

Galvanizing
CRC is cleaned and annealed in a NOx (oxides of nitrogen) furnace before being dipped into
molten zinc (galvanized) in an inert (chemically unreactive) atmosphere where zinc forms
a metallurgical bond with the steel. The final product GC is relatively more resistant to
corrosion than CRC due to zinc coating.

Source: ISL Website

Disclosures
Please refer to the important disclosures at the back of this report. 18
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Underweight Marketweight Overweight International Steels Limited

ISL Early CRC Expansion to Help Expand
Key Themes & Implications
ISL is expanding its CRC capacity by 450k tpa. CRC
Market Share in both CRC & GC Segments
capacity will complement ISLs recent GC ISL is poised to become the first listed steel company to pass
expansion. Volumetric driven growth from
expansion, together with anti-dumping duties will million ton capacity milestone. Its 312k tpa GC capacity
provide ISL a solid footing. expansion (which started operations in Aug-15) is expected to be
supported by 450k tpa CRC expansion which is projected to come
Share Information online by 4QFY18.
Market Cap (PKR/US$) 56.1bn / 0.5bn ISLs GM profile has improved over the last two years led by
52-Week Range 42.0 167.8 improvement in realized spreads of both CRC-HRC / GC-HRC.
The stronger spreads are likely to sustain due to anti-dumping
Daily Avg. Volume 2.8mn
duties (on both CRC and GC products).
Shares Outs. 435.0mn
While recent rally reduced the gap in valuations, ASL still trades
Free Float 25%
at relatively decent FY18F / FY19F PE of 11.5x / 7.8x indicating
Performance 1M 3M 12M
that there is still room in valuations. Our FCFF based Jun-18 PT
Absolute 15% 8% 224% of PKR178/share offers an upside of 38%. BUY.
Rel. to Index 12% 15% 206%
CRC Expansion to Support Existing GC Capacity: ISL currently is the
Major Shareholder largest domestic player in the flat steel market hosting 462k / 550k tpa CRC /
International Industries (INIL) 56.33% GC capacity which is 71% / 100% of total domestic capacities. Its market share
Sumitomo Corp in GC segment is 48% while its market share in CRC segment is second to ASL
9.08%
at 21%, as it is more focused on premium margin GC segment (see Chart 23). In
Valuation this backdrop, ISL is setting up a CRC capacity of 450k tpa making it the first
FY16A FY17E FY18F FY19F domestic listed steel company to pass million ton capacity milestone. The CRC
EPS 2.71 6.93 11.23 16.61 expansion, expected to come online by 4QFY18, is projected to support recent
DPS 1.25 3.00 4.50 6.50 GC expansion of 312k tpa (which came online in Aug-15) but remains
constrained by CRC capacity (GC utilization: 52% in FY16). We expect CRC
PE (x) 47.55 18.60 11.47 7.76
expansion to take CRC / GC utilization to 80% / 100% by FY19 from 66% / 52%
P/B (x) 7.85 5.83 4.25 3.04
in FY16 (see Chart 21 & 22) and raise ISLs CRC / GC market share to 43% /
Dividend Yield 1.0% 2.3% 3.5% 5.0% 69% in FY19 from 21% / 48% in FY16 (see Chart 23). We estimate the expansion
to result in incremental earnings of PKR4.05-6.96/share between FY19-23;
Price & Volume where every 100k tons increase in CRC / GC output is expected to raise FY19F
EPS by PKR1.55 / PKR2.99 (or 9.3% / 18.0%), refer to our dispatches sensitivity
PKR Volume (RHS) Closing Mn table on Page 22.
180.0 12.0
160.0 Expansion Capex & Financing: The Brownfield expansion is expected to
10.0
140.0 entail a capex of PKR5.6bn where the management plans to finance it through
120.0 8.0
100.0
a mix of debt and internal equity. In this regard, we have assumed it to be
80.0
6.0 financed through a debt/equity mix of 50/50. We expect company to be able to
60.0 4.0 finance equity portion of capex through internal cash generation as its FY18F
40.0
20.0
2.0 EBITDA of PKR8.0bn would be more than enough to cover existing dividend
- - payout and planned capex for expansion.
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17

Apr-17

Jun-17
May-17
Mar-17
Feb-17

Jul-17

Improvement in Capital Structure to Continue: ISLs capital structure has

improved remarkably over the years led by improving profitability and debt
Source: Elixir Research, Company Accounts, PSX, CIQ repayments where its D/E has come down to 74% as at Mar-17 from 264% as at
Jun-12. Despite the planned debt financing for expansion, D/E is expected to
continue to improve thereafter (see Chart 24).
Company Profile Stronger Spreads Likely to Sustain: ISLs GM profile has improved over the
ISL is subsidiary of International Industries (INIL) last two years due to better realized spreads (expected to have averaged 195 in
and belongs to Chinoy Group of Companies. It FY17) led by improvement in realized spreads of both CRC-HRC and GC-HRC.
currently hosts a 550k tpa / 462k tpa GC plant at The stronger spreads are likely to sustain due to anti-dumping duties (on both
Landhi Industrial Area. It The Company has taken CRC and GC products). However, there remains a risk of contraction in realized
up expansion plan of 450k tpa CRC capacity which
will make it the first listed steel company to pass a spreads. In this regard, we estimate every USD10/ton decline in CRC-HRC /
million ton capacity milestone. GC-HRC spreads to result in decline in FY18 EPS of PKR0.31 / PKR0.66 (or
2.7% / 5.9%), refer to our spreads sensitivity table on Page 22.

Disclosures
Please refer to the important disclosures at the back of this report. 19
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Diversification through Captive Power Plant: ISL has 19.2MW gas fired power plant in
place that is self-sufficient in its electricity requirements and also allows the company to sell
the excess electricity to Karachi Electric (KEL), which contributed ~PKR0.16/share in FY16
earnings.
Valuation: The stock performance has remained volatile in recent months owing to concerns
over sliding international spreads and political noise. While the recent rally has reduced the
gap in valuations, the stock still trades at FY18F / FY19F PE of 11.5x / 7.8x indicating that
there is still room left in valuations. Our FCFF based Jun-18 PT of PKR178/share offers an
upside of 38%. BUY.

Chart 21: CRC to Go Up Post-Expansion Chart 22: GC Dispatches to Rise Post CRC Expansion

Source: Company Accounts, Elixir Research Source: Company Accounts, Elixir Research

Chart 23: CRC / GC Market Share to Increase Post CRC Expansion Chart 24: D/E & D/A to Come Down With Improved Earnings

Source: Company Accounts, Elixir Research Source: Company Accounts, Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 20
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Chart 25: Realized Spreads Remain High Due to Greater Proportion of GC Chart 26: Price (PKR/share) Relative to PE

Source: Company Accounts, Elixir Research Source: Company Accounts, Elixir Research

Chart 27: Price (PKR/share) Relative to P/B Chart 28: Price (PKR/share) Relative to EV/EBITDA

Source: Company Accounts, Elixir Research Source: Company Accounts, Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 21
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

ISL Earnings Sensitivity

Earnings Sensitivity to Realized Spreads
Realized Spreads (USD/ton) EPS (PKR)
CRC-HRC GC-HRC FY18F FY19F FY20F PT
120 200 8.32 11.97 13.33 120
130 210 9.29 13.53 15.07 140
140 220 10.26 15.07 16.78 159
150 230 11.23 16.61 18.49 178
160 240 12.20 18.15 20.18 196
170 250 13.17 19.69 21.89 215
180 260 14.14 21.24 23.63 234
Source: Elixir Research
Base Case Estimates Highlighted

Earnings Sensitivity to Dispatches

CRC Dispatches GC Dispatches EPS EPS EPS
(000 tons) (000 tons) (PKR) (PKR) (%)
71 267 6.87 (4.37) -39%
71 367 9.74 (1.49) -13%
171 267 8.35 (2.88) -26%
FY18F 171 367 11.23
171 467 12.79 1.56 14%
271 367 12.72 1.49 13%
271 467 14.28 3.05 27%
242 362 12.07 (4.54) -27%
242 462 15.06 (1.55) -9%
FY19F 342 362 13.62 (2.99) -18%
342 462 16.61
442 462 18.17 1.55 9%
276 362 13.75 (4.74) -26%
276 462 16.86 (1.62) -9%
FY20F 376 362 15.37 (3.12) -17%
376 462 18.49
476 462 20.11 1.62 9%
Source: Elixir Research
Base Case Estimates Highlighted

Disclosures
Please refer to the important disclosures at the back of this report. 22
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

ISL - Financial Summary

FY13 FY14 FY15 FY16 FY17E FY18F FY19F FY20F FY21F FY22F
Profit & Loss Statement
Turnover 17,603 21,291 17,938 20,499 34,816 43,442 66,716 72,139 78,177 84,911
Operating Costs (15,760) (18,808) (16,246) (17,243) (27,950) (35,362) (54,935) (59,548) (64,696) (70,448)
EBITDA 1,842 2,483 1,692 3,256 6,866 8,081 11,781 12,591 13,481 14,462
Depreciation & Amortization (434) (513) (542) (711) (761) (761) (1,041) (1,084) (1,127) (1,170)
Operating Profit 1,409 1,970 1,150 2,545 6,106 7,320 10,741 11,507 12,354 13,292
Financial Charges (993) (982) (1,028) (732) (533) (433) (582) (414) (313) (242)
Other Income/(Charges) 25 (114) 114 (159) (286) (373) (523) (371) (164) 59
Pre-tax profit 441 874 236 1,654 5,287 6,514 9,636 10,723 11,877 13,108
Tax (79) (184) (34) (476) (2,273) (1,629) (2,409) (2,681) (3,563) (3,932)
Profit After Tax 363 690 202 1,179 3,014 4,886 7,227 8,042 8,314 9,176
Balance Sheet
Cash & Cash Equivalents 14 37 38 38 70 87 2,438 6,917 11,000 16,125
Trade Debts 551 1,186 362 521 774 965 1,483 1,603 1,737 1,887
Inventory 2,616 3,667 4,438 5,314 7,839 8,891 12,246 11,606 12,600 13,709
Current Assets 4,801 7,103 6,742 8,364 10,557 11,892 18,194 22,235 27,530 34,001
Fixed Assets 9,952 9,772 12,332 12,620 12,760 18,798 18,758 18,674 18,548 18,378
Non-Current Assets 9,960 9,775 12,333 12,620 12,760 18,798 18,758 18,675 18,548 18,378
Total Assets 14,761 16,879 19,075 20,984 23,317 30,690 36,952 40,910 46,078 52,380
Creditors 1,021 1,956 2,280 4,695 5,978 7,119 11,367 11,482 12,793 13,924
Short Term Borrowings 4,121 4,876 4,069 3,524 1,276 2,193 - - - -
Current Maturities: Long Term
783 750 850 699 996 996 1,306 1,195 684 684
Debt
Current Liabilities 6,083 7,728 7,412 8,961 8,311 10,366 12,729 12,730 13,528 14,658
Long Term Debt 3,372 3,001 5,741 4,045 3,720 5,524 4,218 3,022 2,400 1,716
Non-Current Liabilities 3,597 3,381 6,133 4,880 5,394 7,131 5,760 4,502 3,821 3,080
Total Liabilities 9,680 11,109 13,545 13,842 13,705 17,497 18,489 17,233 17,349 17,738
Shareholders' Equity 5,081 5,770 5,530 7,143 9,613 13,193 18,463 23,677 28,729 34,642
Total Sources 14,761 16,879 19,075 20,984 23,317 30,690 36,952 40,910 46,078 52,380
Cash Flow Statement
Recurring Net Profit 363 690 202 1,179 3,014 4,886 7,227 8,042 8,314 9,176
Depreciation 434 513 542 711 761 761 1,041 1,084 1,127 1,170
Working Capital Changes 2,754 (1,202) 765 1,067 (23) (246) 231 488 38 (274)
Operating Cash Flows 3,550 2 1,510 2,957 3,751 5,400 8,499 9,614 9,479 10,072
Capex (1,453) (328) (3,100) (999) (901) (6,798) (1,001) (1,001) (1,001) (1,001)
Add: Interest (After Tax) 815 774 881 521 304 324 436 310 219 170
Others 570 (1) (7) 434 - - - - - -
FCFF 3,482 447 (716) 2,914 3,155 (1,074) 7,934 8,924 8,697 9,241
Less: Interest (After Tax) (815) (774) (881) (521) (304) (324) (436) (310) (219) (170)
Net Debt (2,657) 351 2,033 (2,392) (2,275) 2,721 (3,189) (1,307) (1,133) (684)
FCFE 10 23 436 (0) 576 1,322 4,309 7,307 7,345 8,387
Dividends Paid - - (435) - (544) (1,305) (1,958) (2,828) (3,263) (3,263)
Net Cash Flow 10 23 1 (0) 32 17 2,351 4,479 4,083 5,125
Source: Elixir Research, Company Accounts

Disclosures
Please refer to the important disclosures at the back of this report. 23
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

ISL - Key Financial Ratios & Valuation

Ratios FY13 FY14 FY15 FY16 FY17E FY18F FY19F FY20F FY21F FY22F
EPS 0.83 1.59 0.46 2.71 6.93 11.23 16.61 18.49 19.11 21.09
DPS - 1.00 - 1.25 3.00 4.50 6.50 7.50 7.50 8.50
BVPS 11.68 13.26 12.71 16.42 22.10 30.33 42.44 54.43 66.04 79.64
PE 154.62 81.28 277.82 47.55 18.60 11.47 7.76 6.97 6.74 6.11
EV/EBITDA 34.91 26.03 39.41 19.74 9.03 8.01 5.02 4.24 3.57 2.93
P/B 11.03 9.72 10.14 7.85 5.83 4.25 3.04 2.37 1.95 1.62
Dividend Yield 0.0% 0.8% 0.0% 1.0% 2.3% 3.5% 5.0% 5.8% 5.8% 6.6%
P/S 3.18 2.63 3.13 2.73 1.61 1.29 0.84 0.78 0.72 0.66
ROE 7.9% 12.7% 3.6% 18.6% 36.0% 42.8% 45.7% 38.2% 31.7% 29.0%
ROA 2.4% 4.4% 1.1% 5.9% 13.6% 18.1% 21.4% 20.7% 19.1% 18.6%
Turnover Growth 32.8% 21.0% -15.7% 14.3% 69.8% 24.8% 53.6% 8.1% 8.4% 8.6%
EBITDA Growth 29.8% 34.8% -31.9% 92.4% 110.9% 17.7% 45.8% 6.9% 7.1% 7.3%
Net Profit Growth n.m. 90.2% -70.7% 484.3% 155.6% 62.1% 47.9% 11.3% 3.4% 10.4%
Payout Ratio 0.0% 63.1% 0.0% 46.1% 43.3% 40.1% 39.1% 40.6% 39.2% 40.3%
Source: Elixir Research, Company Accounts

Valuation FY19F FY20F FY21F FY22F FY23F FY24F FY25F

Risk Free Rate 7.40%
Beta 1.073
Market Premium 6.00%
Risk Premium 0.00%
Cost of Equity 13.84%
Cost of Debt 9.40%
Target debt financing 0.00%
WACC 13.84%
Terminal Growth Rate 3.00%
FCFF (PKR mn) 7,934 8,924 8,697 9,241 10,184 11,110 11,832
PV of Adjusted FCFF (PKR mn) 40,462 6,970 6,886 5,895 5,503 5,327 5,105 4,776
Terminal Value (PKR mn) 112,450
PV of Terminal Value (PKR mn) 45,389
Total PV of FCFF (PKR mn) 85,851
Net Debt (PKR mn) (8,626)
PV of Equity (PKR mn) 77,224
Total Shares (mn) 435
Jun-18 PT (PKR/Share) 178
Source: Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 24
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Underweight Marketweight Overweight Aisha Steels Limited

ASL All Set to Turn Black
Key Themes & Implications
ASL is expanding its 1) CRC capacity by 480k tpa (3.2x) to 700k
ASL is expanding its CRC / GC capacity by 480k tpa
tpa, and 2) product offering with planned GC capacity of 250k
/ 250k tpa. Volumetric driven growth from
expansion, together with anti-dumping duties will tpa. CRC / GC capacities (expected COD: 2QFY19 / 4QFY19)
provide ASL a solid footing where entry into GC would significantly improve ASLs margins and earnings
segment will further enhance spreads and resultant profile.
earnings.
ASLs GM has improved considerably over the last two years
owing to increase in realized CRC-HRC spreads. The stronger
Share Information spreads are likely to sustain due to the recent imposition of anti-
Market Cap (PKR/US$) 18.3bn / 0.2bn dumping duties (on both CRC and GC products).
52-Week Range 8.0 29.6 The stock trades at premium FY18 / FY19 / FY20 PE of 20.8x /
Daily Avg. Volume 11.6mn 19.5x / 7.2x, reflecting sharp earnings growth post-expansion.
Our FCFF based Jun-18 PT of PKR30/share offers an upside of
Shares Outs. 832.1mn
36%. BUY.
Free Float 25%
Expansions to Drive Earnings Growth: ASL is a relatively smaller player in
Performance 1M 3M 12M
flat steel industry, currently hosting only CRC capacity of 220K (29% of local
Absolute 17% 4% 203% CRC capacity); yet it has held a relatively greater market share of 30% in CRC
Rel. to Index 14% 11% 185% vs. ISLs 21%. Nonetheless, ASL remained marred by losses due to compressed
margins (resulting from cheaper Chinese dumping) up till FY16. Lately, the
Major Shareholder
company has experienced a turnaround in earnings led by jump in realized
Arif Habib Corp 29.44% spreads from USD92/ton in FY16 to USD163/ton in FY17 which was largely
Metal One Corp 24.57% attributable to anti-dumping duties imposed on Chinese imports. In the
backdrop of improved business conditions, ASL has announced to expand CRC
Valuation
capacity by 480k tpa (3.2x) to 700k tpa and also set up 250k tpa GC capacity;
FY16A FY17E FY18F FY19F which are expected to be operational by 2QFY19 and 4QFY19, respectively. In
Diluted EPS -0.47 1.58 1.05 1.12 this regard, we expect: 1) CRC dispatches to grow at 10% p.a., and 2) GC capacity
DPS 0.00 0.00 0.00 0.50 to operate at 50% utilization in the first year of operations with a dispatch
growth of 10% p.a. thereafter (see Chart 29 & 30). As such, ASL is expected to
PE (x) n.m. 13.55 20.76 19.51
maintain its CRC market share at 30% post expansion while it is expected to
P/B (x) 2.25 2.14 1.93 1.75 capture 17% market share of GC segment (see Chart 31). We estimate the
Dividend Yield 0.0% 0.0% 0.0% 2.3% expansion to result in incremental earnings of PKR1.76-3.60/share between
FY20-23, where every 100k tons increase in CRC / GC output is expected to
raise FY20 EPS by PKR0.81 / PKR1.55, respectively (refer to our dispatches
sensitivity table on Page 28).
Price & Volume
Expansion Capex & Financing: The Brownfield expansion is expected to
entail a capex of PKR5.4bn which will likely be financed through a debt/equity
PKR Volume (RHS) Closing Mn mix of 60/40. In this regard, ASL has issued a right of PKR2.3bn in 4QFY17 for
30.0 60.0
equity portion of expansion capex.
25.0 50.0
Long Road to Capital Structure Improvement: ASL has held a complex
20.0 40.0
capital structure (involving convertible preference shares) which was heavily
15.0 30.0 tilted towards debt financing. In this regard, ASLs significant portion of
10.0 20.0 preferred capital was converted into ordinary capital during the year, which was
5.0 10.0 over and above the issuance of right shares amounting to PKR2.3bn (43% of
- - expansion capex) during the year. This has brought down ASLs precarious D/E
from 365% as at Jun-16 to 190% as at Mar-17 (expected to further fall to 62%
Apr-17
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17

Jun-17
May-17
Mar-17
Feb-17

Jul-17

due to recent rights issue and preference shares conversion), see Chart 32.
However, this is still on a higher side and entails a significant risk for
Source: Elixir Research, Company Accounts, PSX, CIQ shareholders. With regards to interest rate risk (that is settling in sight), we
estimate that every 1 ppt increase will reduce FY20 EPS by PKR0.06 (or 2.0%).
Stronger Spreads Likely to Sustain: While realized spreads have improved
Company Profile to USD163/ton in FY17 vs. USD92/ton in FY16 owing to anti-dumping duties,
spreads are expected to further improve post expansion due to increase in
ASL is subsidiary of Arif Habib Group. It currently
premium margin GC sales (see Chart 33). However, there also remains a risk of
hosts a 220k tpa CRC plant at Port Qasim. It has
taken up expansion plan of 480k tpa /250k tpa for contraction in realized spreads. In this regard, we estimate that every
CRC / GC to increase its presence/market share in USD10/ton decline in CRC-HRC / GC-HRC spreads will result in FY20 EPS
domestic market. attrition of PKR0.26 / PKR0.12 (or -8.7% / -4.1%), refer to our spreads
sensitivity table on Page 28.

Disclosures
Please refer to the important disclosures at the back of this report. 25
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Valuation: The stock trades at premium FY18 / FY19 / FY20 PE of 20.8x / 19.5x / 7.2x,
reflecting sharp earnings growth post-expansion. The other relative valuation multiples
P/B, P/S, and EV/EBITDA also indicate premium valuations. We contend that ASL is still
below its fair value due to earnings growth post expansion (3-year (FY17-20) / 5-year
(FY17-22) earnings CAGR of 23% / 21%). Our FCFF based Jun-18 PT of PKR30/share offers
an upside of 36%. BUY.

Chart 29: CRC Production to Go Up Post-Expansion Chart 30: GC Sales to Offer Additional Income Stream

Source: Company Accounts, Elixir Research Source: Company Accounts, Elixir Research

Chart 31: GC Market Share to Increase; CRC Market Share to Remain Stable Chart 32: D/E & D/A to Come Down With Rights Issue & Improved Earnings

Source: Company Accounts, Elixir Research Source: Company Accounts, Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 26
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Chart 33: Realized Spreads to Improve With GC Sales Post-Expansion Chart 34: Price (PKR/share) Relative to PE

Source: Bloomberg, Elixir Research Source: Bloomberg, Elixir Research

Chart 35: Price (PKR/share) Relative to P/B Chart 36: Price (PKR/share) Relative to EV/EBITDA

Source: Company Accounts, Elixir Research Source: Company Accounts, Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 27
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

ASL Earnings Sensitivity

Earnings Sensitivity to Realized Spreads
Realized Spreads (USD/ton) EPS (PKR)
CRC-HRC GC-HRC FY18F FY19F FY20F PT
120 200 0.44 0.38 1.77 16
130 210 0.65 0.63 2.18 20
140 220 0.85 0.88 2.61 25
150 230 1.06 1.13 3.04 30
160 240 1.27 1.38 3.46 34
170 250 1.47 1.63 3.88 39
180 260 1.68 1.87 4.30 44
Source: Elixir Research
Base Case Estimates Highlighted

Earnings Sensitivity to Dispatches

CRC dispatches GC dispatches EPS EPS EPS
(000 tons) (000 tons) (PKR) (PKR) (%)
FY18F 220 - 1.06
142 - 0.29 (0.84) -74%
FY19F 242 - 1.13
342 - 1.96 0.84 74%
166 25 0.51 (2.52) -83%
166 125 2.17 (0.87) -29%
266 25 1.38 (1.65) -54%
FY20F 266 125 3.04
266 225 4.68 1.64 54%
366 125 3.90 0.86 28%
366 225 5.54 2.50 82%
Source: Elixir Research
Base Case Estimates Highlighted

Disclosures
Please refer to the important disclosures at the back of this report. 28
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

ASL - Financial Summary

Profit & Loss Statement FY13 FY14 FY15 FY16 FY17E FY18F FY19F FY20F FY21F FY22F
Turnover 4,342 9,259 9,492 9,634 15,572 16,478 18,845 32,821 37,538 42,932
Operating Costs (4,328) (9,031) (9,256) (8,468) (12,806) (14,489) (16,569) (27,840) (31,838) (36,411)
EBITDA 13 228 236 1,166 2,765 1,989 2,277 4,980 5,699 6,522
Depreciation & Amortization (255) (344) (358) (362) (400) (400) (400) (670) (698) (725)
Operating Profit (242) (116) (122) 804 2,365 1,589 1,877 4,310 5,002 5,797
Financial Charges (891) (1,299) (1,373) (1,021) (840) (407) (576) (653) (516) (415)
Other Income/(Charges) 19 1,007 6 25 (88) 51 12 (228) (267) (304)
Pre-tax profit (1,115) (409) (1,488) (192) 1,437 1,233 1,313 3,430 4,219 5,078
Tax 369 62 277 37 (43) (308) (328) (857) (1,055) (1,523)
Profit After Tax (746) (347) (1,211) (155) 1,394 925 985 2,572 3,164 3,555
Preferred Dividends (100) (92) (137) (234) (43) (43) (46) (46) (46) (46)
Net Profit After Preferred Dividends (845) (438) (1,348) (388) 1,351 882 938 2,526 3,118 3,508
Balance Sheet
Cash & Cash Equivalents 206 60 132 45 1,652 3,092 188 698 805 1,522
Trade Debts 191 192 76 77 87 92 105 182 209 239
Inventory 2,323 3,347 2,433 2,814 3,612 4,079 4,649 7,815 8,919 10,181
Current Assets 3,864 5,272 4,167 4,468 6,538 8,498 6,227 10,032 11,323 13,387
Fixed Assets 9,785 10,219 9,996 9,689 9,789 11,804 16,055 16,185 16,288 16,362
Non-Current Assets 10,486 11,009 11,170 10,884 11,301 13,377 17,690 17,885 18,055 18,200
Total Assets 14,351 16,280 15,337 15,352 17,840 21,875 23,918 27,918 29,378 31,587
Creditors 2,492 4,574 2,744 2,773 3,833 4,209 4,808 8,695 9,226 10,531
Short Term Borrowings 3,030 3,369 3,876 3,870 - - 965 - - -
Current Maturities: Long Term Debt 893 15 13 503 500 500 1,074 1,398 1,398 1,023
Current Liabilities 6,998 8,243 6,898 7,342 4,433 4,805 6,938 10,181 10,709 11,636
Long Term Debt 5,085 5,489 5,605 5,324 4,810 7,550 6,476 5,078 3,680 2,657
Non-Current Liabilities 5,100 5,504 5,628 5,355 4,840 7,579 6,504 5,104 3,705 2,681
Total Liabilities 12,099 13,746 12,526 12,697 9,273 12,384 13,442 15,286 14,414 14,317
Shareholders' Equity 2,252 2,534 2,811 2,655 8,566 9,491 10,476 12,632 14,964 17,270
Total Sources 14,351 16,280 15,337 15,352 17,840 21,875 23,918 27,918 29,378 31,587
Cash Flow Statement
Recurring Net Profit (746) (347) (1,211) (155) 1,394 925 985 2,572 3,164 3,555
Depreciation 255 344 358 362 400 400 400 670 698 725
Working Capital Changes (1,305) 136 (1,050) (445) 183 (210) (102) 522 (725) (116)
Operating Cash Flows (1,795) 133 (1,903) (237) 1,977 1,115 1,283 3,765 3,137 4,163
Capex (558) (772) (133) (53) (500) (2,415) (4,651) (800) (800) (800)
Add: Interest (After Tax) 596 1,101 1,117 824 815 305 432 489 387 291
Others - 629 (231) (1) 879 - - - - -
FCFF (1,757) 1,091 (1,151) 533 3,172 (995) (2,936) 3,454 2,724 3,654
Less: Interest (After Tax) (596) (1,101) (1,117) (824) (815) (305) (432) (489) (387) (291)
Net Debt 2,522 (135) 621 203 (4,387) 2,740 465 (2,039) (1,398) (1,398)
FCFE 169 (146) (1,647) (88) (2,030) 1,440 (2,903) 926 939 1,965
Dividends Paid - - - - - - - (416) (832) (1,248)
Equity Issued - - 1,719 - 3,638 - - - - -
Net Cash Flow 169 (146) 72 (88) 1,607 1,440 (2,903) 510 107 717
Source: Elixir Research, Company Accounts

Disclosures
Please refer to the important disclosures at the back of this report. 29
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

ASL - Key Financial Ratios & Valuation

Ratios FY13 FY14 FY15 FY16 FY17E FY18F FY19F FY20F FY21F FY22F
Basic EPS* (1.02) (0.53) (1.62) (0.47) 1.62 1.06 1.13 3.04 3.75 4.22
Diluted EPS** (1.02) (0.53) (1.62) (0.47) 1.58 1.05 1.12 2.92 3.60 4.04
DPS* - - - - - - 0.50 1.00 1.50 1.50
BVPS* 8.33 9.35 10.37 9.77 10.29 11.41 12.59 15.18 17.98 20.75
PE n.m. n.m. n.m. n.m. 13.55 20.76 19.51 7.25 5.87 5.22
EV/EBITDA 1,121.79 64.93 64.89 13.40 7.94 11.70 11.70 4.84 3.96 3.14
P/B 2.64 2.35 2.12 2.25 2.14 1.93 1.75 1.45 1.22 1.06
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.3% 4.5% 6.8% 6.8%
P/S 4.38 2.05 2.00 1.97 1.22 1.15 1.01 0.58 0.51 0.44
ROE -32.2% -18.3% -50.4% -14.2% 24.1% 9.8% 9.4% 21.9% 22.6% 21.8%
ROA -6.7% -2.9% -8.5% -2.5% 8.1% 4.4% 4.1% 9.7% 10.9% 11.5%
D/E 400% 350% 338% 365% 62% 85% 81% 51% 34% 21%
D/A 63% 55% 62% 63% 30% 37% 36% 23% 17% 12%
Turnover Growth n.m. 113.3% 2.5% 1.5% 61.6% 5.8% 14.4% 74.2% 14.4% 14.4%
EBITDA Growth -109.1% 1630.4% 3.8% 393.8% 137.1% -28.1% 14.5% 118.8% 14.4% 14.4%
Net Profit Growth 310.7% -48.1% 207.4% -71.2% -447.8% -34.7% 6.4% 169.2% 23.4% 12.5%
Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 44.7% 34.2% 41.7% 37.1%
Source: Elixir Research, Company Accounts
* On current number of ordinary shares (832mn)
** On current number of total ordinary & preference shares (880mn)

Valuation FY19F FY20F FY21F FY22F FY23F FY24F FY25F

Risk Free Rate 7.40%
Beta 1.227
Market Premium 6.00%
Cost of Equity 14.76%
Cost of non-equity financing 9.40%
Target debt financing 0.00%
WACC 14.76%
Terminal Growth Rate 3.00%
Adjusted FCFF (PKR mn) (2,890) 3,500 2,770 3,700 4,371 5,135 6,035
PV of Adjusted FCFF (PKR mn) 10,850 (2,518) 2,658 1,833 2,133 2,196 2,248 2,302
Terminal Value (PKR mn) 52,845
PV of Terminal Value (PKR mn) 20,157
Total PV of Adjusted FCFF (PKR mn) 31,007
Net Debt (PKR mn) (4,958)
PV of Equity (PKR mn) 26,048
Total Ordinary & Preference Shares (mn) 880
Jun-18 PT (PKR/Share) 30
Source: Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report. 30
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

Glossary
HRC Hot Rolled Coil
CRC Cold Rolled Coil
GC Galvanized Coil
ISL International Steel Limited
ASL Aisha Steel Limited
MoF Ministry of Finance
PAMA Pakistan Automotive Manufacturers Association
LSM Large Scale Manufacturing
PBS Pakistan Bureau of Statistics
PSDP Public Sector Development Program
CPEC China Pakistan Economic Corridor
SBP State Bank of Pakistan
MPD&R Ministry of Planning, Development & Reform
NTC National Tariff Commission
CCP Competition Commission of Pakistan
LHC Lahore High Court
NOx Oxides of Nitrogen
KEL Karachi Electric
COD Commercial Operations Date
GM Gross Margin
PT Price Target

Disclosures
Please refer to the important disclosures at the back of this report. 31
 Industrial: Building & Construction Materials
Pakistan
August 09, 2017

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Disclosures
Please refer to the important disclosures at the back of this report. 32
Industrial: Building & Construction Materials
Pakistan
August 09, 2017

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Disclosures
Please refer to the important disclosures at the back of this report. 33