International Industries Limited (IIL)

Brief history:

International Industries Limited (IIL) was established in 1948 as Sultan Chinoy & Company and later next year incorporated as International Industries Limited (IIL). Initially a trading company, IIL went through several stages of expansions where in 1965 it started manufacturing welded steel pipes and tubes. It went public in 1984. Today, IIL is a leading producer of steel and polyethylene pipes. Over the span of 40 years the company has grown from a small pipe manufacturer with equity of Rs 1.6 million to become Pakistan's largest pipe and tube manufacturer with consolidated equity of nearly Rs 9 billion.

The company caters to a wide variety of market segments including, oil & gas, residential/commercial construction, government sector, auto industry, building services, furniture and transformer sector. IIL also has an export footprint across 47 countries going from North and South Americas, Europe, Australia, Middle East, Africa and South Asia. The company's international sales till FY15 stood at over 700,000 tons.

Shareholding, subsidiary activities and investments

The company was set up by Amir S. Chinoy in 1948, and has remained in the family since. Majority of the company's shares are held by Directors and family (31.1% in FY16), while 7.2 percent of the shares are held by National Investment Trust and 5.1 percent by National Bank of Pakistan.

Over the years the company has made several large scale investments. In 1952, the company sponsored Pakistan Cables Limited (PCL) in a joint venture with BICC UK. PCL is a listed company and is in the business of manufacturing copper rods, wires and cables, in addition to being the country's first manufacturer of copper cables and wiring.

In 2007, it incorporated International Steels Ltd (ISL) in co-operation with Sumitomo Corp and IFC. ISL is a large manufacturer of cold rolled steel and galvanized steel coils in Pakistan with annual production capacities of 250,000 tons and 150,000 tons respectively. Seven years later in 2014, IIL incorporated IIL Australia Pty Limited located in Victoria. A year later in 2015, the company incorporated another subsidiary called IIL Stainless Steel Pvt Limited which locally manufactures stainless steel tubes.

Today, the company holds 56.33 percent ownership interest in ISL; 8.52 percent in PCL and 100 percent ownership interest in both IIL Australia and IIL SS. ISL has now been reporting its business results separately for five years, and is earning a healthy profit.

The company invested Rs 700 million during FY16 in IIL Stainless Steel with the commissioning of new Hollow Structural Sections (HSS) and API pipe mill that would produce up to 12 inch diameter of pipes and cover up to X70 API grade for oil, gas and water distribution. The company will potentially capture demand from distribution network emanating from TAPI and other gas pipeline projects.

IIL is exploring several expansion and investment opportunities. It is evaluating the possibility of setting up a drip irrigation pipe plant. It is also setting up a new factory in Lahore and is expanding its PPRC pipe manufacturing facility to cater to the water segment more. The company is also weighing the possibility of setting up a plant in Sri Lanka to cater to the market there.

Operational and financial performance- IIL and group performance

IIL's own top line grew from Rs 13.4 billion to Rs 17.7 billion between FY10 and FY13 but has fluctuated between these in later years. FY16 was a tougher year with international prices falling to record low levels and the company's net revenues falling to Rs 14.8 billion. Export sales volume fell because of countervailing duties imposed on its exports by North American countries.

But in consolidated results, the group has been performing well (the group consists of IIL, the holding company, and ISL, IIL Australia, and IIL Stainless Steel as the subsidiaries)-net revenues reaching Rs 33 billion in FY16; from Rs 13.4 billion in FY10. IIL and ISL together set a volume in excess of 571,000 tons. IIL Stainless Steel completed its first full year of operations in FY16 but faces competition from cheap commercial imports. ILL Australia also earned a nominal profit.

IIL has managed to retain a margin of 16 percent through the years since FY10. After-tax profits have declined in the past six years, coming down from Rs 1 billion to Rs 786 million in FY16. In consolidated results, group profits have had a better luck-with profits reaching Rs 1.95 billion in FY16, and earnings per share going up from Rs 8.4 to Rs 12 due to an excellent performance from ISL.

During FY16, IIL's distribution expenses went up significantly on account of legal charges and higher freight due to an anti-dumping case underway in the US. In terms of efficiency, the company has committed to the efficient use of resources by utilising all waste heat to generate chilled water, which in turn, fulfils the factory's water-cooling and air-conditioning requirements. It has a Reverse Osmosis Plant which helps meet additional water requirements at the factory premises. IIL also generates electricity though co-generation. Its own needs are met through this generation and excess electricity is transported to the national grid.

In the outgoing year, ISL successfully completed capacity enhancements for the conversion of its compact cold rolling mill to a twin-stand reversing mill, added a second galvanising line and commissioned a colour coating steel line. The expansion was carried out at an approximate cost of Rs 3 billion and has enhanced ISL's capacity to well over 500,000 MT per annum.

The outlook for company remains largely optimistic in investor perception-stock price outperformed the KSE-index by a mile since August and expansions and group performance is driving this confidence.

Snapshot of Q1FY17

IIL has kicked off the fiscal year with a solid bottom-line largely associated to other income coming into the company associated to dividend income from its subsidiary, ISL. In unconsolidated results, the company saw a decline in net sales of 6.7 percent between Q1FY17 (Rs 3 billion) and Q1FY16 (Rs 3.2 billion), with a reduction in cost of sales which is a positive sign contributing to an increased margin in Q1FY17 of 18 percent, from 13 percent this time last fiscal.

Despite increases in distribution and administrative expenses, the company saw a quadrupled after-tax profit during the first quarter of FY17-from Rs 95.1 million to Rs 473.5 million owing to solid increase in other income. Consequently, the earnings per share for the company also increased.

ISL earned a profit of Rs 566 million while ISL's fully owned subsidiaries; IIL Australia posted a profit of Rs 0.3 million and IIL Stainless Steel a loss of Rs 0.2 million. Overall, the group did tremendously during the quarter against this time last year. The group's net turnover stood at Rs 9 billion in Q1FY17 and after tax profit stood at Rs 772 million with an earnings per share of Rs 4.40.

Outlook- opportunities and threats

IIL together with its subsidiaries is entering new segments in the market. With the construction boom and CPEC-led growth, demand for high quality and wide variety steel pipes and tubes will go up and will drive the growth for the group with ISL already shining through with its performance. The expansions and investments in new technology will bode well in the long term against local competitors. A major threat for the company remains international raw material prices for steel and zinc since the group is an importer of these materials and fluctuations in costs affect the top line significantly.

The company has created its space in international markets with diversified regions which will help the company in the long run as turnover won't be dependent on one market and more opportunities for growth will exist. Existing increase in capacity ties in well with demand. If expansions in Sri Lanka come through, the company will have a solid local footprint in a market where it is currently exporting.