International Steels Ltd (ISL) has posted a strong rebound in profitability in 2QFY21, with an NPAT of PKR2.22bn (EPS: PKR5.09), compared to an NPAT of PKR0.12bn (EPS: PKR0.27) in SPLY. This takes the cumulative 1HFY21 NPAT to PKR2.77bn (EPS: PKR6.38). The result is substantially above our expected 2QFY21 EPS of PKR2.58, with the deviation stemming from higher-than-expected gross margins, likely due to HRC held at lower prices from last quarter (inventory gains) and exceptionally high CRC-HRC spreads in 4Q, says a report of IMS Research.
Major takeaways from 2QFY21:
ISL has posted Net Sales of PKR17.9bn for the quarter, up by 29% yoy and 14% qoq, primarily on the back of several price increments during 2Q and robust demand from 2/3 wheelers (sales of which were up 16% yoy and 12% qoq) and other industries using flat steel.
GM’s have surged to 20% vs. 8.9% in 1QFY21 (above our expectations). Margins rose significantly on a sequential basis due to lower HRC prices during 1Q (c.US$568/ton vs. c.US$628 during 2Q) – inventory held from the previous quarter – alongside local CRC price increments which were timed efficiently on account of higher international prices in 2Q (c.US$764/ton in 2Q vs c.US$648 in 1Q). The CRC-HRC spreads also witnessed a staggering 44% qoq jump, resulting in higher margins.
Admin costs have risen to PKR89mn (up 22% yoy and 58% qoq), indicating the revival in activity post Covid-19, whereas other expenses are up 3x qoq.
Another variance is seen in selling and distribution expenses, which is not commensurate with the increase in sales, clocking in lower than expected (down 20% yoy but up 22% qoq).
ISL has posted lower-than-expected finance cost, declining by 74% yoy and 31% qoq to PKR179mn. This points towards greater deleveraging during the quarter besides lower interest rates, in our view.
The company has also announced an interim cash dividend of PKR3.0/sh for the quarter in the backdrop of solid earnings.
ISL remained comfortable on the demand front in 2Q, sustaining the volumetric momentum from last quarter. However, the exorbitant international spreads and timely price increments drove the 2Q earnings. The steel demand phenomena in China has been the key driver for higher prices and spreads, resulting in bumper earnings for ISL. Volumes are expected to remain healthy going forward as demand from 2/3 wheelers, white goods and construction industry depict a positive trajectory. We remain Neutral on the stock with a June 2021 TP of PKR89/sh. We will however look to revise our estimates on availability of quarterly accounts.