International Steels Ltd (ISL) has posted NPAT of PKR1.5bn (EPS: PKR3.48) in 3QFY23 compared to NLAT of PKR388mn (LPS: PKR0.89) in 2QFY23. The result came in much higher than our projected EPS of PKR1.00, with major variance stemming from higher than expected revenues, owing to higher volumetric sales and increased gross margins too. This takes 9MFY23 NPAT to PKR1.6bn (EPS: PKR3.62), down 71% YoY.

Key takeaways from 3QFY23 results:

§ Net revenue has clocked in at PKR23.9bn, up c.37% QoQ but down 12% YoY. This came in much above our expectation of PKR17.9bn, where higher-than-expected volumetric offtake is likely behind the key deviation.

§ ISL has posted gross margins of 13.3% in 3Q, up 9.0ppt QoQ and 4.8ppt YoY, higher than our expectations of 10.5%. The margin increase can be due to higher-than-expected inventory gains amid PKR depreciation, and elevated volumes.

§ Distribution and Administration expenses have come in at PKR287mn (up 3.5x QoQ) and PKR105mn (up 23% QoQ), respectively. Elevated volumetric sales largely drive higher distribution expenses during the quarter and higher transport costs, in our view.

§ Among other line items: (i) finance cost has surprisingly reduced by 50% QoQ, despite rising interest rates. We believe that the company paid off interest bearing debt during the quarter, which helped ISL to manage finance cost, and (ii) effective tax rate clocked in at 28% in 3Q versus 18% SPLY.

ISL has posted an impressive result, primarily led by an elevated topline and healthy margins. The company has also managed to curb finance cost during a rising interest rate environment. Looking ahead, we believe that subdued demand amid import led restrictions, overall slowdown in economic activity and elevated inflation will likely keep a check on margins and profitability of the company. We currently have a Buy rating on the stock with a TP of PKR75/sh. However, we will look to revise our estimates in light of altered macroeconomic factors.

Courtesy- Intermarket Securities Limited