International Steels Ltd (ISL) has posted NPAT of PKR1.1bn (EPS: PKR2.60) in 3QFY22, down a sharp c.30% qoq and c.50% yoy. This takes 9MFY22 EPS to PKR12.31, down c.22% yoy. The 3Q result has come broadly in line with our projected EPS of PKR2.70 higher-than-expected revenues have been offset by lower margins.

Key takeaways from 3QFY22 results:

Net revenue has clocked in at PKR27.3bn, up 57% yoy, beating our expectation of c.PKR20bn by some distance, amid greater volumetric offtake and higher CRC prices. The surge in offtake is attributed to healthy production volumes from the tractors and white goods industries, in our view.

ISL has posted gross margins of c.8.4% in 3Q, down c.7ppt yoy, significantly lower than our expectations of 13.5%. This decline in margins emerged from moderating inventory gains coupled with lower than expected CRC-HRC spreads, during the quarter, in our view.

Distribution and Administration expenses have come in at PKR346mn (up c.35% yoy) and PKR75mn (down c.43% yoy). In our view, higher distribution expenses can be explained by greater transport costs both locally and globally (sea freight and local petrol prices). We await the availability of quarterly accounts for further clarity on these items.

The finance cost of at PKR361mn has more than doubled yoy, largely attributed to rising borrowing costs (higher Kibor rate) and exchange losses, in our view. The effective tax rate clocked in at 18% in 3Q.

Despite the surge in sales, ISL has posted a weak result, which was overshadowed by the sharp decline in gross margins. In our view, the recent PKR volatility and depressed CRC-HRC spreads (currently below US$90/ton) are likely to keep margins in check in the coming quarter. In our view, the planned backward integration into an HRC plant is a key trigger for both stock price and profitability.

We thus have a Buy rating on the stock with a June 2023 TP of PKR91/sh.

Courtesy- Intermarket Securities Limited.