ISL reported 1QFY24 NPAT of PKR1.1bn (EPS: PKR 2.57), representing a sharp 2.5x YoY increase but lower by 42% QoQ. The result aligns with our projected NPAT of PKR 1.1bn (EPS: PKR 2.64). The sequential decline in earnings can be primarily attributed to normalizing gross margins – a result of declining CRC prices and rising grid prices.

Key takeaways from 1QFY24 results:

§ Net revenue has reached PKR19.2bn, a substantial 16%YoY rise albeit flat QoQ and inline with our estimated sales projections of PKR19.9bn. Revenues have remained stable even in the face of falling flat steel prices – this resilience springs from higher sales volume.

§ ISL posted gross margins of 12.8% in 1Q, down 0.7ppt YoY and 10.7 ppt QoQ and much lower than our expectations of 15.7%. This can be attributed to declining CRC prices and upward revision in grid prices leading to a normalization of gross margins during the quarter.

§ The company posted finance cost of PKR196mn, down 10% QoQ and 77% YoY. This is lower than our estimated finance cost of PKR305mn. We believe the decline in finance cost is likely due to further reduction in in short term borrowing, however we await detailed financials for clarity.

§ Among other line items: (i) Distribution expenses and administrative expenses were both down 34% and 18% QoQ but up 463% and 59% YoY respectively, and (ii) effective tax rate clocked in at 37% in 1QFY24 versus 8% in SPLY.

Margin normalization may have impacted the company’s earnings this quarter; however higher sales volumes and effective control over finance costs in the face of rising interest rates has helped support earnings. Reduced leverage positions the company favorably to capitalize on increased demand in the future, particularly if the 2/3 wheeler segment continues to exhibit positive signs of improvement, driven by the rising rural demand stemming from strong agricultural crop yields. We currently maintain a Buy rating on the stock with a TP of PKR75/sh.

Courtesy- Intermarket Securities Limited.