International Steels Limited (PSX: ISL) was set up as a public limited company in 2007 under the repealed Companies Ordinance, 1984 (now, Companies Act, 2017). It is a subsidiary of International Industries Limited. ISL’s product offering includes cold rolled, galvanized and color coated steel coils and sheets.
Shareholding pattern
As at June 30, 2021, over 56 percent shares were held under the category of sponsor/holding company. This category solely includes International Industries Limited. The local general public owns over 13 percent shares followed by nine percent held in associated companies, undertakings and related parties. The latter solely includes Sumtomo Corporation. The directors, CEO, their spouses and minor children own 2.6 percent shares while the remaining about 19 percent shares are with the rest of the shareholder categories.
Historical operational performance
The company has mostly seen a growing topline with the exception of FY15 and FY20. Profit margins, on the other hand, declined between FY17 and FY20, before improving again in FY21.
In FY18, International Steel Limited’s revenue grew by over 41 percent, crossing Rs 47 billion. Volumetric gain stood at 10 percent. The double-digit growth of revenue was primarily due to a rise in global steel prices. Overall, as well, there was an increase in construction activities that encouraged demand for steel and allied products. During the year, the company completed its new Compact Cold Rolling Mill that increased capacity to one million tons. With cost of production slightly higher at nearly 84 percent, gross margin was recorded at a lower 16 percent, compared to 17.5 percent in FY17. However, net margin was very marginally better at 9.17 percent due to a notably lower tax expense.
Revenue growth in FY19 stood at 20.7 percent increasing topline to over Rs 57 billion. While galvanized sales volumes registered a decline of 11 percent, cold rolled products increased by almost 12 percent. On the other hand, cost of production increased to nearly 89 percent of revenue, attributed to higher international steel prices, exchange rate fluctuation and rising interest rates. As a result, gross margin shrunk to 11.2 percent, while an escalation in finance expense due to rising interest rates, coupled with getting project finance, reduced net margin to 4.6 percent for the year.
After growing for four consecutive years, topline of ISL in FY20 contracted by over 16 percent with revenue falling to Rs 48 billion. Sales volumes were also lower with galvanized sales reduced by 23 percent and cold rolled products by 17 percent. Moreover, cost of production further increased to consume over 91 percent of revenue, bringing gross margin down to 8.8 percent. With rising financing requirements, finance expense increased to make up nearly 5 percent of revenue, thereby reducing net margin to one percent, the lowest seen since FY13.
Topline bounced back in FY21 as it posted a growth of over 45 percent to reach close to Rs 70 billion. Overall sales volumes increased by 17.6 percent. This was largely contributed by galvanized sales that posted a growth of 23 percent year-on-year. Sales volumes for Cold Rolled products increased by 10 percent. Domestic sales increased by 19 percent while export sales registered an incline of 11 percent. The latter was due to Covid-19 related restriction that opened up new untapped export destinations for the company. With cost of production also at an all-time low of 80.67 percent of revenue, gross margin increased to 19.3 percent. This also reflected in the net margin that was also recorded at the highest 10.7 percent, bottomline posted at Rs 7.5 billion.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was higher by over 56 percent year on year. This was attributed to demand recovery as lockdowns eased. There was a strong growth in both export sales as well as domestic sales. In addition, production cost was notably better at 82 percent compared to 91 percent in 1QFY21. The resultant improved gross margin also translated into better net margin as the latter was recorded at nearly 11 percent compared to 3.6 percent in 1QFY21.
In the second quarter revenue was again higher year on year, by over five percent. The company continued to witness rising export sales. In addition, the de-bottlenecking project to expand Cold Rolled capacity is planned to begin in the second half of the year. However, the rise in production cost to nearly 85 percent of revenue versus 80 percent in 2QFY21, reduced profitability for the year as seen in a lower net margin of over 8 percent versus 12.4 percent in 2QFY21.
In the third quarter revenue was higher by almost 57 percent year on year with both export sales and domestic sales seeing an increase in volumes. However, production cost was significantly higher at over 91 percent compared to 76.4 percent in 3QFY21. This can be attributed to a surge in commodity prices, particularly since the beginning of the Ukraine-Russia conflict. Thus, net margin was reduced to 4.1 percent compared to 13.7 percent in 3QFY21.
ISL has seen a consistent growth in volumes both on the domestic and export front. In addition, its de-bottlenecking project is also on track to be completed in the fourth quarter. However, with the economy undergoing challenges such as rising oil prices, widening current account deficit and inflationary pressures, profitability cannot be ascertained.