Pakistan Steel industry financial performance in 1QFY21

We expect our Steel Universe to post cumulative 1QFY21 NPAT of PKR1,063mn, nearly double the NPAT of PKR531mn in SPLY. The overall profitability is expected to surge primarily due to increase in sales led by pent-up demand from the previous quarter and new demand generated by rising construction activity.

ASTL and MUGHAL’s top-line is expected to rise by 54% and 37% yoy respectively, on the back of an increase in local cement dispatches (up 15% qoq and 17% yoy) pointing towards an increase in volumetric demand of long steel. We also expect higher gross margins for the two companies amid higher utilization (lower fixed costs per unit).

ISL’s top-line is expected to rise by 36% yoy in the backdrop of higher 2/3 wheelers’ sales (up 137% qoq and 21% yoy) and greater demand from other end products. Margins will be better due to several price hikes and improved international CRC-HRC spreads during 1Q.

ASTL: Higher volumetric turnover expected to result in profit

We expect Amreli Steels (ASTL) to post a NPAT of PKR25mn (EPS: PKR0.08) for 1QFY21, compared to a loss of PKR81mn (LPS: PKR0.27) in the same period last year and PKR438mn (LPS: PKR1.48) in 4QFY20 (which was majorly impacted by lockdowns). Besides our expectation of higher volumes (courtesy rising construction activity following government incentives), the improvement in earnings also stems from lower finance cost, expected 17% lower yoy. ASTL will continue to avail tax credit under section 65(e) which allows a 5yr tax holiday. We maintain our Neutral stance on ASTL due to the 14% rally in the stock price since we our last report on the name. Our June 2021 TP is PKR44.0/sh.

MUGHAL: Easing of lockdowns to substantially boost sales

Mughal Steel (MUGHAL) is expected to post a NPAT of PKR353mn (EPS: PKR1.40) for 1QFY21, compared to a NPAT of PKR264mn (EPS: PKR1.05) in SPLY. The expected earnings growth emanates from higher sales which is inspired by increased cement dispatches during 1Q (up 15% qoq and 17% yoy) – concentrated in the North region. Pent-up demand from the previous quarter coupled with revived demand from the construction space are key underlying factors. Net sales are thus expected to grow 37% yoy and 52% qoq (albeit from a low base) due to higher volumes. Gross margins are expected to improve by 8ppt qoq to 11.3%. Recall that MUGHAL emerged unscathed from the last quarter despite major dip in sales (unlike in case of ASTL) because of a more diversified product mix. We remain Neutral on MUGHAL with a TP of PKR68/sh.

ISL: Surge in flat steel demand indicates upward trajectory

Upbeat demand from 2/3 wheelers (up 137% qoq and 21% yoy) and other flat steel reliant industries points toward an increase in sales, where we expect ISL to post 1QFY21 NPAT of PKR685mn (EPS: PKR1.58) compared to NPAT of PKR348mn (EPS: PKR0.80) during SPLY. The significantly higher sales (up 36% yoy) are also expected to be the result of several price hikes during 1Q. CRC-HRC spreads also improved during the quarter, averaging US$81/ton during the quarter, up 44% qoq (crossing the US$100/ton mark in September). Resultantly, we expect margins to hover around 11.3% (vs 8.5% during last quarter). We are Neutral on ISL with a TP of PKR74/sh. A trigger for the stock will be resumption of sales to the pipe-making industry (currently disallowed under SRO641). (Intermarket Securities Limited.)

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