Press Release

JCR-VIS Assigns Initial Ratings to Agha Steel Industries

Karachi, December 5, 2017: JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘A/A-1’ (Single A/A-One) to Agha Steel Industries (ASIL). Outlook on the assigned ratings is ‘Stable’.

Agha Steel Industries Limited (ASIL) is amongst the top-tier players in the long steel sector with installed capacity of billets and reinforcement bars (rebars) at 240,000MT and 150,000MT, respectively. Competitive advantage stems from the company being the only private sector manufacturer in the country using Electric Arc Furnace for manufacturing of billets. ASIL’s capacity utilization level of bars stood at 91% (FY16: 85%) during FY17. In order to cater to rising demand, ASIL is in the process of expanding its rebar capacity by around 5 times. The expansion will be funded through a mix of debt and equity. The equity portion will be funded through a planned Initial Public Offering.

The assigned ratings to ASIL incorporate improving financial risk profile as evident from decline in leverage indicators and adequate cash flows in relation to outstanding obligations. Ratings also reflect strong demand dynamics of the steel sector on the back of higher infrastructure development and demand for housing. Moreover, improving corporate governance framework is also an important rating driver.

Overall sectoral risk is considered high given the fragmented nature of the industry, expected increase in competition post capacity expansion by major players (three of the major existing players are increasing their capacity by over 3(x)), cyclical nature of the industry and the threat of dumping particularly from China. However, outlook for the sector has witnessed noticeable improvement on the back of robust demand, imposition of regulatory and anti-dumping duties on imported billets and rebars, and enhanced efficiencies of top-tier players post capacity enhancement.

During FY16 and FY17, volumetric sales of rebars have increased by 28% and 15%, respectively. ASIL’s market position is stronger in the Southern market with increased penetration planned in the Northern region. The same is considered important in the backdrop of sizeable capacities coming online. In addition, growth in retail sales will also be pursued for mitigating the likely adverse impact of concentration in sales. Increase in profitability is a function of improved volumetric off-take and higher gross margins which compare favorably to peers. While gearing levels are projected to increase to fund proposed expansion, the same are expected to remain within manageable levels. Future trend with respect to leverage indicators, particularly in the backdrop of significant capex plans, will continue to be tracked by JCR-VIS.

Overall corporate governance framework has improved over time with conversion of the company into a public unlisted company and improvement in board composition (increase in board size and induction of independent directors). Management is in the process of further improving internal control framework through strengthening of internal audit function, finalization of SoPs and installation of a SAP or Oracle based ERP system. JCR-VIS will track progress against planned initiatives, going forward.

For further information on this rating announcement, please contact the undersigned (Ext: 201) at 021-35311861-71 or fax to 021-35311872-3.

Javed Callea

Applicable Rating Criteria: Industrial Corporates (May 2016)

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2017 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .