Karachi, September 30, 2022 (PPI-OT): ISL: Bottom-line erosion on brunt from all fronts

International Steels Limited (ISL) conducted its Corporate Briefing yesterday. To recall, the company announced 4QFY22 EPS at Rs0.13, -98% YoY over lower margins, higher finance costs and higher taxes. This took FY22 EPS to Rs12.44, -28% YoY. Company also announced a final dividend of Rs4.5/share with the result, in addition to cumulative interim DPS of Rs2.0.

Despite higher revenue, margins declined by 10ppt YoY to 13.7% in 4QFY22 due to restriction on import of raw materials, gas curtailment issues, significant increase in raw material prices and rupee depreciation.

Due to fiscal consolidation, we anticipate a continued decline in volumetric sales in FY23 over slowdown in construction activity. As macro situation improves, an improving demand outlook could provide ISL the required room to grow.

Super tax strips away 4QFY22 earnings

International Steels Limited (ISL) conducted its Corporate Briefing yesterday. To recall, the company posted meagre earnings in 4QFY22 of Rs0.13/share, compared to an EPS of Rs5.32 in SPLY. This took FY22 EPS to accumulate to Rs12.44, -28% YoY.

During the quarter, despite higher selling prices top-line growth remained limited to 11% YoY over 14% YoY lower volumes. Sharp rupee devaluation, higher raw material prices, gas curtailment and import restrictions took a toll on the company’s gross margins, which dropped 10ppt on a YoY basis to 13.7%. Bottom-line was also impacted by higher finance cost and higher tax charge of Rs898mn. Out of the said taxes, Rs716mn (Rs1.65/share) was due to the 10% super tax charge. Despite a dull year, ISL announced a final dividend of Rs4.5 alongside the FY22 results, taking full year pay-out to Rs6.5.

Existing and future projects

Management apprised that rewinding line with the electrolytic cleaning section was commissioned by the end of the outgoing year and will be contributing from FY23, the project had an estimated capex of around Rs1.23bn. Management shared that the newly installed line will help in enhancing the capacity of Cold Rolled Coils by 120k tons/annum to 350k tons/annum and improving the quality of the products along with increasing the efficiency for TMBP (Tin Mill Black Plate) production. ISL availed SBP’s TERF and LTFF facilities for this enhancement.

Company has plans to setup an HRC facility by setting up a Hot Strip Mill in the country with a capacity of 1.2mn tons. The HRC plant will provide with low and medium carbon steel which is used in pipe, building structures, automotive sector and appliances industries. The project will take around 36 months to complete, commencing operations by start of FY26.

Volumes and margins to witness more pressure

Prices for metals have been under pressure globally over worries of tightening monetary policies and concerns on economic slowdown. We expect rising inventories will likely keep international prices in check for steel. Similarly, fiscal consolidation in Pakistan will likely keep the ongoing momentum of slowdown in construction activities. To remain competitive and protect market share ISL has recently decreased prices of CRC and HGDC last month by ~Rs12k/ton.

Management expects volumetric sales during FY23 to decline by 4% over lower demand, rebounding by 5% YoY from FY24 and onward. Management is of the view that CRC prices have bottomed out and production cuts may again push up prices at some point in time. HRC prices have also been declining providing room to the company to procure raw material frequently amid 100% cash margin requirements. Management also shared that the sea freight has reduced significantly in the last few weeks.

Flood impacts to add to woes

The company’s key customers include electrical appliances manufacturers, bike manufacturers, pipe manufacturers and the construction sector all of which are facing lower demand. There has been a noticeable decline in sales to two-wheeler segment as it is closely linked with rural sector’s income which is under pressure after the recent catastrophic floods. The likely pressure on FY23 earnings coupled with uncertain near-term demand outlook is likely to restrain short term stock price performance.