FY20 Result Highlights of International Steels

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In FY20, ISL posted NPAT of PKR495mn (EPS: PKR1.14), as compared to a NPAT of PKR2.6bn (EPS PKR6.12) in FY19. The key impediments to earnings during FY20 were (i) domestic market contraction led by slowdown in automobile and appliances production, (ii) higher interest rates, (iii) Forex volatility (PKR depreciation), (iv) rising input costs (gas prices up 30% yoy) and (v) Covid-19 induced disruption.

Business Performance and Outlook

During FY20, ISL sold 418,000 tons of flat steel vs 525,000 tons in FY19 (domestic market size of approximately 950,000 tons in FY20), out of which c. 20% of the sales comprised of exports (84,000 tons) to 20 countries. The company is aggressively penetrating into new markets (albeit exports are low margin relative to domestic market).

The company is expecting to reach utilization levels of 50-55% during FY21 (c. 500-550k tons), considering ISL cannot sell directly to the pipe-making industry anymore (as per SRO641), which includes INIL (ISL’s parent and largest customer in the past).

The management expects domestic steel sector to grow by c.10% per annum (reaching 1.25mn tons by FY23). CRC is being imported by the auto sector (4-wheeler) based on SRO655, which allows duty free imports. This segment cannot be substituted by domestic CRC due to higher duties on HRC import by ISL and variation in quality.

ISL has expanded its footprint by setting up a service center, which will cater to auto makers and other industries located within close proximity. It is expected to add value by providing various services to its customers (cut to length, slitting, profiling). The company currently provides flat steel for majority of the parts used in 2/3 wheelers and a few for tractors and buses. Additionally, it provides steel to other industries such as appliances, construction, drums etc.

ISL has the lowest breakeven margins among competitors due to cheaper electricity (PKR2-3KWh/ton lower than grid), where majority of its cost of sales have remained flat over the years.

About PKR1.4bn has been provided by ISL on account of GIDC, which has to be paid in 24 equal installments, where 31 July 2020 was the last day for GIDC being charged (no GIDC ever since).

Indigenous manufacturing of HRC has been under evaluation by the management in the past four years (Total project cost is c.US$350mn); however, it will only be viable if import duty is levied on HRC and government provides a commitment to keep it intact.

Global HRC prices have recovered since the FY20 lows while the reopening of industries globally, showing some stability. However, there still exists supply tightness in international markets, where China has become a net importer and is expected to remain so till the end of 2020.

According to the management, demand outlook remains uncertain, as demand has not picked up globally and the possibility of a second wave is looming globally. Moreover, countrywide gas shortage for power generation can also act as a potential threat going forward (captive power); however, it has not yet impacted ISL. (Intermarket Securities Limited)

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