Group 8

Ali Haider 22110243

Mian Muhammad Asad Jamil 22110074
Aiyla Suhail Arshad Khan 22110049
Mahnoor Tahir 22110274
Muhammad Hannan Naushahi 22110296
Rajveer Ahuja 22020400

Aisha Steel Mills Limited (ASML)

Aisha Steel Mills Limited (ASML) owned by Arif Habib is a Private Group Company. Formed
in 2005, the company started its commercial operation in 2012 and is one of the largest
investments by the private sector manufacturers in “Flat Rolled Steel – Cold Rolled and Hot
Dipped Galvanized coils located in Port Qasim, Karachi- the most suitable plant location for
export market” (Company Profile).
The vision of the company is to “To be a world class manufacturer in Flat-Rolled Steel Industry,
acknowledged by its customers for providing quality products and excellent service.” It ensures
best quality Cold Rolled Coil (CRC) and Galvanized Coil (GI) delivered to the customers
through investment in the latest Japanese, Germany and Austrian machinery for CRC, and SMS
equipment for GI production. The use of state-of-the-art technology gives them a competitive
edge over other producers and importers of CRC in terms of quality. The recent expansion of
production has increased its capacity to 700,000 tons enabling them to fulfil demand and stand
strong against competitors.
“To become an efficient producer of flat steel through continuous improvement in product and
quality with the help of trained and motivated employees, highest business and work ethics that
adds value for customers while serving the interests of all stakeholders” is the mission of ASML.
The company produces Cold Rolled Coils and Sheets in SPCC, SPCD, SPCE and SPCG (IF)
Grades. CRC is widely applicable and is a premium raw material adding value to the output like
Infrastructural development of many industries including Auto, Engineering, Appliances and
Pipe manufacturing sectors. In addition to satisfying the needs of its customers including both
industries and the general population, they successfully ensure sustained returns on investment to
their shareholders. Their aim is to have a positive impact on the economy and people of Pakistan
through responsible investment.

Economic Analysis
Pakistan has observed an economic slowdown towards the third quarter (January-March) of the
fiscal year 2019-2020. It is mainly due to the Covid-19 outbreak, but the economy was already
facing a mild recession before the outbreak. The government imposed full to partial lockdowns
across the country, and due to which several businesses are shut down, and several people are
unemployed. Exports have drastically deceased suing March due to a decrease in international
trade in and the remittances for the same month have taken a huge hit as well. "The fund
projected Pakistan's economy to shrink by 1.5pc during this fiscal year, compared to 3.3pc
growth in 2018-19. These estimates are generally comparable with 1.3pc decline in the country's
economic output forecast by the World Bank on Sunday." (Dawn News). Based on this, we can
say that currently, Pakistan is facing a stagnant economy.
In the long run, Pakistan Economy could heal and grow only if the government remains
implementing structural reforms to boost private investment. According to the IMF, the GDP
growth of Pakistan is projected to grow from 2.35% in 2020 to 5.02% in 2023 (Plecher, 2019).
The IMF data also shows that “Pakistan's budget deficit would gradually reduce from 7.4% of
GDP in the ongoing fiscal year 2020 to 2.6 percent of GDP by FY2024” (World Economic
Outlook Database October 2019). If Covid-19 is gone by the end of next fiscal year and Pakistan
government is fair to the private and public sector in its policies, then there's a very high
probability that Pakistan's economy will grow in the long run and people of Pakistan will enjoy
better living standards. And that is good news for steel manufacturers because high income
would encourage people to invest more in buildings, constructions, and infrastructure.

Pressure Points –The economic variables most relevant to the industry:

Pakistan Infrastructure Spending: Pakistan has been spending a significant amount on
infrastructure since the last decade. "Pakistan spends, on average, 2.1% of its GDP on
infrastructure". This amount is very close to the US and other developed nations. Spending on
infrastructure is projected to grow because of the BRI (Belt and Road Initiative) Project. This
increased spending on infrastructure will be advantageous to the steel industry of Pakistan,
including Aisha Steel Mills, which will foster its growth in Revenues.
As mentioned previously, IMF has projected the real GDP growth in Pakistan to be 2.35% in
2020, 3.00% in 2021, 4.53% in 2022, and 5.02% in 2023. Now, if Pakistan spends 2.1% of its
GDP on infrastructures in 2020, then the percentage of GDP spent on infrastructure would be
2.68% in 2021, 4.05% in 2022, and 4.50% in 2023.
Tax Rate:
The corporate tax rate in Pakistan has been declining since 2012. Corporate taxes were 35% in
2012, and it has been gradually declining from 35% in 2012 to 29 % in 2020. It has been
projected to decline more in the future. According to report published by Deloitte in 2018, "The
corporate tax rate is 29% for the 2019 tax year (reduced from 30% for the tax year 2018) and is
imposed on the net taxable income of a company. The corporate tax rate will be reduced by 1%
each year from 2019 until the rate reaches 25% in the tax year 2023". Therefore, we can infer
from this report, that the corporate tax rate in coming years will follow the decreasing trend. In
the long run, lower corporate taxes will be advantageous to Aisha steel mills as well as other
firms because it will encourage firms to produce more and invest in other viable opportunities.
Costs:
Aisha Steel Mills imports its raw materials mainly from China and Japan. This gives benefit to
the company because Chinese raw materials are cheaper and better in quality than the raw
materials from other importers. According to a Chinese newspaper, ChinaDaily.com, Chinese
Yuan to remain stable rather than temporary fluctuations. The exchange rate with China won't
fluctuate for the coming few years, so our costs aren't going to fluctuate as well. However, there
are still many possibilities that the exchange rate might go high, but we will assume that it's
going to stay stable in the coming few years. Moreover, China Pakistan Economic Corridor, also
known as CPEC, will be beneficial for the imports in the steel industry of Pakistan. Trade will
become much easier; the transportation network will become much easier, and the costs will
surely decrease.
Inflation Rate:
Pakistan's inflation rate in 2020 is about 13-14%, and it has already caused a mild recession in
the economy of Pakistan. However, for the coming years, IMF has projected the Inflation rate in
Pakistan to decline to 8.31% in 2021, 6% in 2022, and 5% in 2023-2024. Lower and stable
inflation rates would result in a lower cost of borrowing in the economy, and firms will be
optimistic about investing, including the steel industry. Moreover, it will be beneficial for the
steel industry since people will start investing in infrastructure, buildings, and other appliances
(Plecher, H, 2019).
 Industry Analysis
Steel Consumption in Pakistan
The domestic steel consumption in Pakistan is around 9 million tons per annum or about 45kg
per capita in comparison to the world average of 228kg per capita. “The experts also estimate
that the consumption trend would continue and double to 18 million tons over the upcoming 5-
year and the ratio of long to flat products will start correcting itself to the globe norm of 52
percent long and 48 percent flat” (Kazmi).
Porter’s Five Forces Analysis:
Industry Rival Intensity
There are many fierce rivals in this industry as the differentiation in the product lineup is almost
negligible. The major rivals of Aisha Steel Mills Limited (ASML) are, Abbas Steel Group, Agha
Steel Industries, Amreli Steels Limited, International Steel Limited and Mughal Iron and Steel
Limited. Due to the high exit costs and the cost of different fixed assets and maintenance, the
competition must always stay ahead. Considering all this information we can safely deduce that
ASML is operating in a climate of high competition.
Threat of New Entrants
In the steel sector, the cost of the assets and the initial set up costs are extremely high. These
costs. The Pakistan Steel Mills Corporation was set up in 1968 at a cost of Rs. 24,700 million
(PAKISTAN STEEL Largest Industrial Complex of Pakistan). In recent years, Hadeed Limited
has entered the market. Due to this ASML has a constant set of competitors for whom they can
plan for.
Bargaining Power of Suppliers
There are several iron ore suppliers in Pakistan, along with several foreign suppliers as well. This
reduces the power of suppliers in the industry. Thus, larger companies like ASML can buy from
these suppliers on higher discounts. As they usually buy in bulk, they would receive further
discounts.
Bargaining Power of Customers
Since many industries in the economy are dependent upon the steel industry, these firms enjoy
the benefit of having power over their customers. However, when these firms negotiate with
international companies and domestic companies which are larger in size, the prices can be
negotiated in the favor of the buyer. However, as it is usually not the case due to the limited
number of high-quality steel manufacturers in Pakistan, ASML does not have to worry about this
aspect of the industry that much.
Threat of Substitutes
There are no real substitutes for steel and hence ASML does not feel pressure from this force in
the model.

PEST Analysis
Political
 Privatization of Pakistan Steel Mills will make the environment more competitive.
 The government plans to take the percentage contribution of manufacturing to GDP up to
25%.
 Manufactured goods are predicted to represent over 85% of the exports.
 Currently political environment in Pakistan is stable which means that ASML can operate
without the fear of nationalization or any political protests which could have hindered its
operations.
 Labor laws in Pakistan are favorable to the industry, hence cheap labor is available.
 Sales Tax rate is the same as before i.e. 17%.
Economic
 In 2019, the economic growth rate of Pakistan was 3.29%, down from 5.53% in 2018 but
according to Statista reports prediction reports, the real GDP growth rate will follow an
increasing trend from 2020 onwards.
 Pakistan currently follows a market-based exchange rate system. At the time of writing
this, the prevailing exchange rate of PKR to USD is PKR160.70 to USD 1. This makes
imports expensive and exports cheaper which is a good sign for the steel industry.
 Prevailing inflation rate is 6.4% in April 2020. However, this can be linked to the recent
slashes in oil prices and due to the Covid-19 crisis.
Social
 The current population growth rate is 2%.
 Pakistan has a young population. 64% of the population is below the age of 30 and 29%
are between the age of 15-29. This means that the labor surge in the market is going to be
huge. This will lower the average cost of labor.
 People are also becoming more conscious about their lifestyle. This will lead to an
increase in demand for products made from steel e.g. housing, cars and many more.
Technology
 Directly Reduced Iron (DRI) Technology being introduced by the government.
 There is not a lot of technological innovation involved in Pakistan.
 Little to no R&D is being done by the companies.
 Firm Analysis

Aisha Steel Limited has 765,529,303 shares outstanding according to the financial reports of
2019. With the changing market and economic conditions both domestically and internationally
ASML has been able to maintain operational efficiency and delivers competitive financial
returns. They were the market leader with 36% share in CRC segment in 2017 as mentioned in
“Flat Steel Product – Sector Update” issued by JCR-VIS. They continued to maintain industry
leadership by selling larger quantities in 2018. The approximate CRC market share increased
from 27% in 2018 to 38% in 2019 and for GI the market share was 28%. The current prices are
under pressure due to coronavirus, the demand in local market is anticipated to increase. In first
quarter of 2020 ASML achieved a sales quantity 58% more compared to corresponding period
last year (Financial reports).
With the spread of Covid-19 to almost all the major countries of the world, the resulting
lockdowns has greatly affected sales and production at the end of March 2020 and prices are
likely to remain under pressure until any further direction or treatment for the virus. All the
construction, machinery, and home appliances stopped functioning and the delay in resumption
of work led to sharp decline in demand. The local market has slowed down and is very cautious
of the situation. The imports of ASML also dropped down by 42% for CRC and 32% for GI, as
to avoid losses international producers have reduced production.
SWOT ANALYSIS:

Strengths:

 The company owns state of the art plant and production facilities one of the largest flat
steel plant in local market.
 Experienced and motivated management with great track record of envisaging and
executing project
 ASML has experienced improving leverage and gearing [ratio of loan capital(debt) to the
value of its ordinary shares(equity)]
 Quality of the products is equivalent to international standards
 Exclusive dealer partners suppling CRC all over Pakistan.
Weaknesses:

 Leveraged (using borrowed money for expansion).

 Low Diversification.
 Low Demand in Coronavirus.
 Dumping of CRC/ HDGC in local market.

Opportunities:

 Product diversification will allow to replace imported material

 The export market for ASML’s products remains largely untapped.
 Huge upcoming infrastructure investments by government such as the projects in Gwadar
shows promising increase in demand of ASML’s products.

Threats:

 Adverse foreign exchange movement can increase the price of input and reduce profi-
tability.
 Reliance on imported material creates an uncertain risk of increase in company's costs
due to any fluctuations in exchange rate.
 Risk of onsite accidents (such as the one happened in during 3rd quarter of 2020).
 Changes in government policies can negatively impact Consumer demand (lockdown in
Coronavirus)
 Assumptions for Pro Forma Statements
Revenue Drivers:
The yearly revenue for the future four years i.e. 2020-2024 in calculated using the concept of
moving average on the percentage change in sales in the past 5 years. The percentage change in
2019 sales is calculated from the publish reports of the company in 2018 but that data is not
shown in the Excel analysis.
Company's quarterly report from December 2019 – March 2020 shows net revenue of 7,024,279
PKR. Since the announcement of global pandemic and lockdown in Pakistan and China (major
supplier) also took place in this given time period, it is safe to assume that this figure has
captured the effects of corona on company’s sales. However, this figure still higher than the
corresponding quarter of last year and that is because of an increase in company's market share
due to expansion in previous years. However, according to company’s reports, this sales figure is
still depressed due to a major fire incident at plant therefore, by taking a pessimistic approach to
our calculations, we have assumed that this figure of 7,024,279 PKR will remain constant for all
the quarters of 2020. The moving average is then applied to next 4 years to isolate the effect on
2020’s revenue since it's an abnormal year and we have assumed that pandemic’s effect will end
after July 2020. The increasing figure in revenue from 2020-2024 is due to company utilizing
more of its production capacity, because according to published reports: “The capacity
utilization, after the expansion to 700,000 tons/year, was 42% compared to 88% recorded for the
corresponding period last year” and increasing projected demand for its products.
Cost of Sales and Other Expenses:
The Cost of Sales and all the other expenses i.e. selling, and distribution expenses and
administrative expenses are calculated as percentage of sales as these expenses are proportional
to magnitude of revenue generated by the company. Moving average is then applied to forecast
these calculations for 2020-2025 and then the forecasted sales figure of a given year is multiplied
with sales of that year to calculate expense amount.
Other expenses for year 2020 to 2024 is assumed to be proportionally related to the forecasted
inflation rate of that year from our economic analysis because the company does not have to pay
any amount for worker participation fund which was initiated in 2017-2018 and the figure in
2019 only shows amount of expense from disposal. Since we have assumed that expense from
disposal is proportionally related to prices in the economy, we have incremented the disposal
expense of previous year by the projected inflation rate of next year according to our economic
analysis.
Tax Expense:
According to our economic analysis, the tax rate is decremented by 1% from the year 2020-2024
and the tax expense is calculated by applying the percentage of a given year on the profit before
taxation. When the company has incurred a loss, we have assumed that the tax expense for that
year will be 0 such as in 2020.

Statement Of financial Position

Non-current Assets:
Variables that are directly linked to sales are predicted based on percentage of sales method.
Non-current assets produce the goods that are sold later, hence percentage of net sales is taken
for each base year. Then through moving average, the predicted non-current assets are
calculated.
Intangibles and Current assets:
The change in each year is calculated, then the average is taken in order to predict next year’s
change. In this case moving average is used as well.
Financial asset-held to maturity investment and Accrued mark up:
Both are only mentioned in 2013 and 2014 statements, after that they have ceased to exist.
Therefore, we have not included them in our current predictions as they represent an abnormal
event which is not continued in subsequent years.
Shareholder’s Equity:
In order to finance the expansion planned in 2018 and 2019, Aisha steel mills issued a large
amount of capital in 2017. Which was further increased by 30% in 2018. However, after that the
plant investment is complete thus suggesting that the firm won’t be needing capital in the coming
years, moreover, right now they plan on fully utilizing their current plant facility. Therefore,
indicating that no other expansion is planned in the coming years.
Rest items such as subscription money are only present when shares were issued, and when we
assume that the share capital remains constant over the next years. Such items are reduced to
zero.
Liabilities:
All the non-current liabilities are calculated using moving average method because we assume
that the firm’s borrowing pattern remains constant from 2020-2024. We have assumed that the
firm has not acquired any new Long term finance and ‘liabilities against assets subject to finance
lease’ and the moving average method is used here as well to calculate the percentage of long
term finance and liabilities against assets to be matured each year. Then this percentage is
applied to Long term finance and Liabilities against assets to calculate the current maturity
amount each year for the time period 2020-2024. Moving average is applied on percentage of
cost of goods sold acquired to the trade payables and that percentage is then multiplied by the
predicted cost of goods sold each for the next 4 yeas to calculate the trade payables.
 Assumptions regarding the Cashflow statements, CAPM & WACC

Cashflow statements
The cash low is calculated using earnings before interest and tax (EBIT-1) model. The earnings
before interest and tax are carried forward from the income statement and the tax is deducted
from the EBIT of each year. After then since depreciation and amortization are non-cash
transactions, they are added back to the after which we get the operating cash flow for each year.
The change in working capital which is calculated by taking the difference of net working capital
of two consecutive years and the capital expenditure is calculated as an increase in total non-
current assets assuming no new assets have been acquired in the years 2020-2024. Both the
change in working capital and capital expenditure is then subtracted from net operating cash flow
to acquire the resultant free cash flow of each year.

Cost of Equity calculations:

Capital asset pricing model (CAPM):
Risk free rate:
The risk fee rate is assumed to be the KIBOR offered rate which is Karachi Inter Bank’s Offered
rate at which the term deposits are exchanged between prime banks in the Pakistani interbank
market. The average of last 5 year’s rates is get a more standardized measure as well as to create
consistency in method of calculating WACC since the average market returns are also calculated
using monthly stock data of last 5 years.
Market Returns (market rate):
Total market return is calculated by multiplying the average change in monthly closing price of
KSE 100’s stock over the last 5 years with number of months per year.
Market Risk Premium & Cost of debt:
Market return is calculated as a difference between the average market return and the risk-free
rate which shows the general risk in the market. The cost of debt is taken as the percentage of
total interest paid on total liabilities of the company in the published statements of the year 2019
and it is assumed to be constant for the year 2020.
Beta:
It is calculated by dividing the covariance of the return of company’s and KSE 100’s stock by
the variance of the market/KSE 100’s return. This captures the volatility of ASML’s stock versus
the overall market.
Weighted Average Cost of Capital:
Weights for WACC are used from the book values of 2019, which came out to be 0.73 debt and
0.27 for equity. The tax rate assumed is 29% which is the current tax rate for the firm as listed in
their statements. Risk free rate is 8.8% currently, moreover cost of equity through CAPM is
5.67%. Which leads to a WACC of 5.56%.
Growth Rate:
Growth rate predictions for Real GDP were taken from IMF as mentioned in economic analysis.
In-order to calculate growth rate after 2024, we used pessimistic approach by applying higher
weightage to current predictions as a higher percentage increase was observed in initial years.
Since data is only available till 2023, we used weighted average method to calculate method
which resulted in almost 5.8% growth. However, since there are very high chances for this trend
to fall and there are high chances pandemic to continue after 2020, we don’t want to overstate the
growth in earnings therefore we have reduced it to 5.6%. These calculations can be seen in the
excel file submitted along with the document.

Stock Price Calculations:

To calculate the share price, we first have calculated the terminal value at 2024 which was
calculated the growing perpetuity method formula assuming that the company has infinite life
and the growth after 2024 will stay constant at 5.6%. The terminal value is then discounted
alongside the respective free cash flows of each of the 4 years at WACC to finally get the
forecasted value of the firm for the year ended 2020. The value of the equity is calculated by
subtracting the value of total liabilities to the firm at the end of the year. The value of equity is
then divided by the number of outstanding shares, which have been assumed to stay constant
after 2019, to calculate the Share price which is 8.39 PKR according to our calculations and
assumptions.

Investment Decision

It is suggested that the stock of Aisha Steel Mills is held by the shareholder as despite the sudden
dip in share price during lockdown. Right after the relaxation of lockdown the share price has
been increasing suggesting that the firm has stable return prospects and growth. Moreover,
expenditure on infrastructure to increase in the coming year in Pakistan, suggesting that the steel
industry will also benefit leading to a likely increase in local demand. Even though the pandemic
has reduced the company’s overall production and revenue , the prospects of increasing revenue
in future seem promising which means the earnings available to the shareholders will increase as
well. The internal management of ASML seems to be motivated and the company does not show
any signs of being engaged in fierce competition with its competitors. Therefore, it is in
investors best interest to hold the stock of ASML.
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