International Steels Limited

International Steels Limited (PSX: ISL) was incorporated in Pakistan as a public unlisted company in 2007. The company is a subsidiary of International Industries Limited. ISL is engaged in the manufacturing of cold rolled, galvanized and color coated steel coils and sheets.

Pattern of Shareholding

As of June 30, 2023, ISL has a total of 435 million shares outstanding which are held by 7688 shareholders. International Industries Limited has the majority stake of 56.33 percent in the company followed by the local general public holding 14.23 percent shares. Sumitomo Corporation, an associated company of ISL holds 9.075 percent in the company. Strategic investor accounts for 4.74 percent of the company’s shares while Directors, their spouses, and minor children hold 3.607 percent of ISL’s shares. Around 2.993 percent shares of ISL are held by the public and other companies while 2.977 percent shares are held by Banks, DFIs, and NBFIs. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

During the period under consideration, ISL’s topline slid twice i.e. in 2020 and 2023. Conversely, its bottom line has followed a downward trajectory in all the years under consideration except 2021. The company’s margins rode a steep downhill journey until 2020 and then rebounded in 2021. The margins drastically fell in 2022. However, in the subsequent year, while gross margins slightly ticked up, operating and net margins continued to erode. The detailed performance review of each of the years under consideration is given below.

In 2019, ISL’s topline grew by 21 percent year-on-year. During the year, the company increased its production capacity by 24 percent year-on-year to clock in at 584,400 tons. Due to the slowdown of economic activity and import of low-priced steel from Russia and China, ISL’s galvanized sales volume dipped by 11 percent to clock in at 307,500 MT while sales volume of cold rolled products increased by 11.8 percent to clock in at 217,500 MT. Gross profit tumbled by 15.5 percent in 2019 on account of the Pak Rupee depreciation and fluctuation in international steel prices. GP margin fell from 16 percent in 2018 to 11.2 percent in 2019. Distribution expense mounted by 61.6 percent year-on-year in 2019 on account of exorbitant freight & forwarding charges due to hike in petroleum prices. Sales and promotion expenses also multiplied during the year to drive up the overall distribution expense. While ISL greatly reduced its payroll expense during the year, escalated legal and professional expenses resulted in only a 0.3 percent dip in administrative charges in 2019. 19.3 percent year-on-year slump in other expenses in 2019 was the effect of lower profit-related provisioning done for the year. Other income also slid by 57.4 percent in 2019 due to lower income from power generation as well as loss on the sale of property, plant & equipment. As a consequence, operating profit declined by 21.7 percent year-on-year in 2019 with OP margin moving down from 13.3 percent in 2018 to 8.6 percent in 2019. 139.2 percent year-on-year spike in finance cost in 2019 was majorly the impact of the high discount rate. Short-term borrowings also increased due to higher working capital requirements. Net profit tumbled by 39 percent year-on-year in 2019 to clock in at Rs.2664.37 million with EPS of Rs.6.12 versus 10.03 in 2018. NP margin also marched down from 9.2 percent in 2018 to 4.6 percent in 2019.

ISL’s sales registered a year-on-year decline of 16.4 percent in 2020. The first half of the year was plagued by high inflation, reduced consumer spending, development spending cuts, and heightened discount rates, while the second half of the year was marred by COVID-19-related restrictions which resulted in an overall economic slowdown. Since, the beginning of the year, the company was targeting new geographical destinations to counterbalance the subdued demand in the home market. As a result, its export sales multiplied by 1.3 times in 2020. However, robust export sales couldn’t drive up the overall sales of ISL. During the year, the company’s production declined by 26 percent year-on-year to clock in at 412,000 tons. The sales volume of its galvanized products decreased by 23 percent year-on-year to clock in at 237,500 MT while the sales volume of cold rolled products dropped by 17 percent to clock in at 180,500 MT. Gross profit shrank by 34.7 percent year-on-year in 2020 with GP margin slipping to 8.8 percent. This was on account of the depreciation in the Pak Rupee and instability in global steel prices. Distribution expenses magnified by 27.4 percent in 2020 due to high freight & forwarding charges incurred by ISL. The company streamlined its workforce from 724 employees in 2019 to 692 employees in 2020, resulting in lower payroll expenses. This coupled with reduced legal & professional charges pushed down administrative expenses by 7.6 percent in 2020. Lower profit-related provisioning pushed down other expenses by 37.4 percent in 2020 while lower income from non-financial assets resulted in a 9.9 percent slump in other income in 2020. As a result, operating profit dropped by 44.5 percent in 2020 with OP margin lessening to 5.7 percent – the lowest during the period under consideration. Finance costs continued to rise by 79.5 percent in 2020 due to a higher discount rate for the most part of the year as well as increased working capital-related borrowings. This translated into an 81.4 percent year-on-year decline in net profit which clocked in at Rs.494.85 million with EPS of Rs.1.14 and an NP margin of 1 percent.

2021 brought about a 45.2 percent expansion in ISL’s net sales which was on account of sound recovery in all the sectors of the economy as the signs of COVID-19 began to subside. The automobile industry rebounded by 23.4 percent in 2021 providing great impetus to the steel industry. Overall, LSM registered a 14.9 percent rise in 2021 compared to a 10.2 percent decline in the previous year. ISL’s overall production increased by 19.42 percent year-on-year in 2021 to clock in at 492,000 MT. The company’s galvanized sales increased by 23 percent in 2021 to clock in at 293,000 MT while cold rolled sales went up by 10 percent to clock in at 199,000 MT. Local sales were mainly propelled by automobile, construction, appliances, and general fabrication sectors. The company was also able to grow its export sales by 11 percent in 2021 by setting its footprint in new markets. Vigorous volumes coupled with upward revision in prices resulted in 220.3 percent growth in ISL’s gross profit in 2021 with GP margin reaching its optimum high value of 19.3 percent. 18.9 percent higher distribution expense incurred by ISL in 2021 was the effect of increased freight & forwarding, sales promotion, rent, rates & taxes as well as salaries. Administrative expenses posted a 37.6 percent spike in 2021 on account of higher payroll as well as legal & professional charges incurred during the year. Increased profit-related provisioning, donations, and impairment loss on property, plant & equipment culminated in 281.9 percent taller other expenses incurred by ISL in 2021. Other income also magnified by 789.1 percent in 2021 primarily on the back of gain on re-measurement of GIDC. Income from bank deposits, government grants, and gains on the sale of fixed assets were also notable contributors in attaining higher other income in 2021. All these factors translated into 302.9 percent bigger operating profit posted by ISL in 2021 with OP margin reaching its highest value of 15.9 percent. Lower discount rate as well as reduced borrowing due to the better liquidity position of the company resulted in a 1408.8 percent rise in net profit which clocked in at Rs.7466.33 million in 2021 with EPS of Rs.17.16 and NP margin of 10.7 percent.

In 2022, ISL witnessed 31 percent year-on-year growth in its net sales. Production volume, however, tells a different tale as it slid by 16.5 percent year-on-year in 2022 to clock in at 411,000 MT. Sales volume was also in line with reduced demand and production. Galvanized sales dropped by 18.088 percent in 2022 to clock in at 240,000 MT while cold rolled products sales dropped by 7.54 percent to clock in at 184,000 MT in 2022. Commodity super cycle in the international market coupled with Pak Rupee depreciation, high inflation, and lackluster demand didn’t allow ISL to pass on the high cost of sales to its consumers, resulting in 8.2 percent year-on-year decline in gross profit in 2022 with GP margin marching down to 13.5 percent. 47 percent hike in distribution expense in 2022 was the outcome of exorbitant freight & forwarding charges due to a spike in the prices of POL products. While ISL enlarged its workforce from 693 employees in 2021 to 705 employees in 2022 which drove up the payroll expense, lower legal & professional charges resulted in 6 percent lower administrative expense in 2022. ISL incurred a hefty exchange loss of Rs. 617.018 million in 2022. This was somewhat offset by lower profit-related provisioning, fewer donations, and no impairment loss incurred during the year, however, still resulted in a 6.2 percent escalation in other expenses. Other income also eroded by 36.4 percent in 2022 due to loss from power generation and lesser gain on the res-measurement of GIDC. This resulted in 16.1 percent smaller operating profit recorded by ISL in 2022 with OP margin moving down to 10.2 percent. Finance costs magnified by 62.9 percent in 2022 on account of monetary tightening as well as enormous working capital-related borrowings. ISL’s bottom line diminished by 27.5 percent year-on-year in 2022 to clock in at Rs.5412.19 million with EPS of Rs.12.44 and NP margin of 5.9 percent.

In 2023, ISL witnessed a 16 percent year-on-year plunge in its topline. Besides economic slowdown, high inflation, floods, depreciation of Pak Rupee as well as import restrictions, the sales of ISL were greatly impacted by tax exemptions provided to the companies in the FATA/PATA region. Sales volume plummeted by 27.36 percent to clock in at 308,000 MT. In line with sluggish economic activity and the resultant low demand, production also shrank by 26 percent to clock in at 304,000 MT. The company’s ability to reduce its energy cost through strategic planning as well as higher margins on export sales due to the Pak Rupee depreciation translated into a slight uptick in GP margin which clocked in at 13.8 percent in 2023. This was despite a 14.3 percent smaller gross profit earned by ISL in 2023. Distribution expense tumbled by 36.2 percent in 2023 on account of lower freight & forwarding and lesser sales & promotion budget for the year. Despite the rationalization of the workforce from 705 employees in 2022 to 688 employees in 2023, an adjustment in minimum wages as well as higher legal & professional charges translated into 14.5 percent higher administrative expenses incurred by ISL in 2023. Hefty exchange loss resulted in a 41.7 percent spike in other expenses in 2023. Other income, on the other hand, shrank by 22.5 percent in 2023 due to greater loss from power generation, reduced government grant & re-measurement gain on GIDC as well as lesser gain on sale of fixed assets. Operating profit nosedived by 20 percent year-on-year in 2022 with OP margin contracting to 9.7 percent. Finance cost posted a 71.2 percent spike in 2023 on account of monetary tightening. This pushed net profit down by 35 percent to clock in at Rs.3518.79 million in 2023 with EPS of Rs.8.09 and NP margin of 4.6 percent.

Recent Performance (1HFY24)

ISL is faring well in 2024 thus far. Its topline strengthened by 17 percent year-on-year in 1QFY24. The detailed financial statements are awaited for further clarity on the sales volume of the company during the period. Lower international flat steel prices, adoption of Just-in-time inventory management coupled with the stability of the Pak Rupee resulted in 79 percent growth in ISL’s gross profit with GP margin rising up from 8.8 percent in 1HFY23 to 13.4 percent in 1HFY24. Distribution expense spiraled by 538 percent year-on-year in 1HFY24 due to increased export volumes and implementation of axle load. The administrative expenses also posted a 54 percent escalation in 1HFY24 supposedly on account of higher payroll expenses. Other expenses shrank by 64 percent in 1HFY24. Conversely, other income spiraled by 143 percent during the period. Operating profit multiplied by 140 percent in 1HFY24 with OP margin rising up from 4.8 percent in 1HFY23 to 9.8 percent in 1HFY24. The company was able to cut down its finance cost by 78 percent in 1HFY24 due to efficient inventory management. This resulted in a 3765 percent escalation in net profit which clocked in at Rs.2352.57 million in 1HFY24 with EPS of Rs.5.41 versus EPS of Rs.0.14 during the same period last year. NP margin also greatly improved from 0.2 percent in 1HFY23 to 5.9 percent in 1HFY24.

Future Outlook

Sales volumes are expected to remain sluggish due to decelerated economic activity in the country and recession in the global market. Dumping from the FATA/PATA region could further affect the volumes. However, stronger margins are expected to be sustained if steel prices remain at the prevailing level.