Agha Steel IPO: Should you buy the company’s stock?

Agha Steel Industries is all set to go public today but experts are divided on the potential of its shares.

The company is in the process of listing on the Pakistan Stock Exchange through an Initial Public Offering.

It is looking to raise Rs3.6 billion at a floor price of Rs30 per share with a fresh issue of 120 million shares. The purpose of the issue is to partially fund the company’s expansion.

The steel industry in Pakistan has a huge potential, Hussain Agha, the company’s CEO, told Samaa Money.

“The steel industry is in the infancy stage in Pakistan,” he said. “We are now on the verge of urbanization. Massive development is just around the corner.”

Agha Steel was about to bring technological revolution in the steel industry in Pakistan through Asia’s first Endless Steel Technology Mi.Da. plant with DRB (Direct Rolling & Bundling) in Karachi, he claimed.

“This will reduce the time required to make steel from days to hours,” Agha said. Agha Steel is the largest player using the electric arc furnace, he added.

But according to AKD Research, the company’s upcoming glittering stock may not be having the shine it appears to have at the moment.

“Our discussion with various industry players shows a consensus on the view that the electrode and cost of keeping inventory partially offset the lower energy consumption gains,” the AKD Research report said. “The use of low-grade scrap compromises the quality of the final product.”

“A company with superior margin profile should command premium valuations but we remain skeptical in Agha Steel’s case both in terms of sustainability and the means to achieve it, i.e. use of low-grade scrap,” it added.

The report said that buying the company’s stock significantly above the floor price would not be rewarding in terms of profit.

But Shankar Talreja, a senior research analyst at Topline Securities, feels that the company has a good profile and the new Mi.Da. technology could help it reduce production cost of its high-grade steel and compete on the basis of price.

Agha Steel will be increasing its annual capacity almost three times i.e. from 250,000 tons to 650,000 tons with capital raised through this IPO.

Talreja says that Pakistan’s market has 60% share of ungraded or low-quality steel, which are good enough for smaller constructions. The reason for the sale of ungraded steel is its lower price than graded steel.

But if Agha Steel is able to reduce the cost of production of its graded steel then it could attract ungraded steel buyers as well, which means it can tap another 60% market.

Hussain Agha claims that the use of technology can help the company reduce 5% of its production cost.

Arsalan Ahmed, another research analyst at JS Research, says the company’s stock was not even enticing at the floor price of Rs30.

“The company has 10 months of inventory, while the industry has a maximum benchmark of three months,” Ahmed said. “It clearly shows inefficiency.”