IPO: Ittefaq Iron Industries

Ittefaq Iron Industries Limited (IISL) will today be undergoing the book building process for what is only the second Initial Public Offering (IPO) at the Pakistan Stock Exchange in 2017. The offer size is 41.75 million shares, of which 75 percent of the issue size comprises of the book building portion at a floor price of Rs12/share, while one-third will be issues for general public.

Surprisingly, the IPO has not received as much research coverage from brokerage houses as IPOs usually do. IISL aims to utilize the expected proceeds of Rs501 million to meet its working capital requirements for increased expected output. Recall that, Pakistan has one of the lowest annual steel consumption of 37.5 kg per capita in the region, which makes it a hugely untapped market, making a good business case for the sector. To put things in context, global annual steel consumption per capita average is north of 200 kg.

In the local context, steel consumption in the last two years has seen massive growth of 22 percent and 33 percent for FY14 and FY15 respectively. IISL meanwhile, could only manage to sustain its top line, registering flat growth for three years. This clearly means that competitors took better advantage of the increased demand.

Here is more reason why IISL’s IPO aimed at improving efficiency makes more sense, as it aims to target CPEC related projects, motorways, and booming construction activities going around. The company already boasts a credible name in the industry, and primarily has to mend affairs at the level of working capital.

IISL’s clientele focuses heavily on public sector contractors which form 70 percent of its total clientele. The company has served and plans to serve the likes of Orange Line, Neelum Jhelum Power Project, Motorways and many more CPEC related projects. It clearly does not seem a matter of creating demand. It exists and is growing, it is more of a matter of channeling it well enough.

IISL’s capacity utilization has been rather on the lower side, which the company puts down to working capital and power constraints. While the IPO is likely to take care of the working capital aspect, power availability will remain a big question mark. That said, 2018 should see much improved availability of power, and should let IISL achieve its target of improving capacity utilization from current 42 percent to 76 percent.

Much will also depend on the regulatory environment, which at present seems to be in favour of local steel players. Recall that the regulatory duty on steel was doubled to 30 percent last year, and the price differential between imported and local steel has also grown which plays in favour of IISL and the likes. This column has no mandate of making calls on valuations, but the street view is positive on IISL.