International Industries Limited

International Industries Limited (PSX: INIL) was incorporated in Pakistan in 1948. The principal activity of the company is the manufacturing and sales of galvanized steel pipes, API line pipes, precision steel tubes as well as polymer pipes and fittings. Besides serving the local market, INIL has a footprint in around 60 countries across the globe.

Pattern of Shareholding

As of June 30, 2023, INIL has a total of 131.882 million shares outstanding which are held by 5414 shareholders. Directors, CEO, Sponsors and their family members constitute the largest shareholding category with a stake of 42.36 percent followed by local general public holding 30.37 percent shares of INIL. Government financial institutions, NIT and NBP related companies account for 10.46 percent shares of INIL while public, private and other companies own 8.49 percent shares. Banks, DFIs and NBFIs hold 4 percent shares of INIL followed by insurance companies with 1.82 percent shares. Around 1.13 percent of the company’s shares are held by its associated companies. The remaining shares are held by other categories of shareholders.

Financial Performance Trail (2019-23)

The topline and bottomline of INIL shows a mixed pattern over the years. The topline inched up in 2019 followed by a plunge in 2020. It then rode an upward trajectory until 2022 followed by a sharp decline in 2023. Conversely, the bottomline posted growth only in 2021 and 2023. In the remaining years, the bottomline kept shrinking and registered net loss in 2020. INIL’s margins continued to drop until 2020, and then recovered in 2021. In 2022, gross and net margins eroded while operating margin progressed. In 2023, all the margins considerably recovered with operating and net margins boasting their optimum high value. The detailed performance review of the period under consideration is given below.

INIL posted marginal uptick of 0.2 percent year-on-year in its topline in 2019. During the year, overall LSM activity plunged by 2.9 percent year-on-year with iron and steel sector registering 11 percent fall. Steel sector took the brunt of lackluster demand from the real-estate, construction and automobile sector due to high inflation and discount rate which took its toll on the purchasing power of consumers. Export sales were also lower due to protectionism in the key export markets of INIL. Cost grew by 2.3 percent year-on-year which pushed down the gross profit by 14.5 percent year-on-year while GP margin also plunged to 10.9 percent in 2019 from 12.7 percent in 2018. Operating expense almost stood at the same level as 2018. Conversely, other expense slumped by 42.97 percent in 2019 on the back of considerably lower profit related provisioning, business development expense and donations. Other income mounted by 96.17 percent in 2019 on account of hefty dividend income from its subsidiary company International Steels Limited (PSX: ISL) as well as sizeable exchange gain. This improved INIL’s operating profit by 16.47 percent in 2019. OP margin also climbed to 11.6 percent in 2019 from 10 percent in 2018. Finance cost magnified by 109 percent in 2019 on account of upward revision in discount rate as well as high short-term borrowings. This pushed down the bottomline by 0.44 percent in 2019 to clock in at Rs.1574.71 million with EPS of Rs. 11.94. NP margin remained intact at 6.1 percent in 2019.

INIL’s topline took the hardest hit in 2020 whereby it nosedived by 27 percent year-on-year due to the lockdown imposed on account of COVID-19 which badly impacted the volumes of the company both locally and internationally. During the year, LSM eroded by 10.17 percent while steel and iron industry took 17.36 percent dive in the local economy. Global economy also faced slowdown and volatility in steel prices. INIL’s cost of sales slipped by 24 percent year-on-year due to low capacity utilization and curtailed operations. GP margin dropped to 7.2 percent in 2020 while gross profit registered a downfall of 51.48 percent. 29 percent lesser selling and distribution expense in 2020 was the result of low freight and forwarding charges as sales volumes remained lackluster. Advertising and marketing activities were also cut back during 2020. Administrative expense rose by a paltry 0.98 percent during 2020. Other expense provided the much needed breather as it slid down by 68.79 percent year-on-year in 2020 on account of lower provisioning for WWF and WPPF. Conversely, other income didn’t turn out to be favorable and shrank by 66.5 percent year-on-year in 2020 due to drastic drop in exchange gain and dividend income from the subsidiary company, ISL. All these factors pushed down the operating profit by 73.21 percent year-on-year in 2020 with a steep decline in OP margin which clocked in at 4.3 percent in 2020. Finance cost grew due to monetary tightening in the initial quarters of FY20. This shoved the bottomline into loss zone. INIL reported net loss of Rs.694.20 million in 2020 with loss per share of Rs.5.26 in 2020.

In 2021, INIL posted staggering 52.6 percent year-on-year growth in topline which came on the back of volumetric growth of 25 percent and 71 percent year-on-year respectively in local and export sales. During the year, LSM improved by 8.99 percent with steel and iron sector rebounding by 1.66 percent. Cost of sales also magnified by 41.91 percent due to record high prices of steel. Yet high sales volume and improved prices of INIL’s products resulted in a 189.76 percent year-on-year growth in gross profit. GP margin boasted a strong rebound and climbed up to 13.7 percent in 2021. 83.78 percent higher distribution expense was the consequence of high inflation as well as rise in ocean freight charges due to higher export sales. Administrative expense also surged by 28.26 percent in 2021 due to increased payroll expense on account of inflationary pressure. High provisioning for WWF and WPPF as well as generous donations drove up the other expense by 514 percent in 2021. Exchange gain slightly reduced due to appreciation in the value of Pak Rupee in 2021; however, high dividend and rental income from subsidiary company saved the day for INIL and its other income flew up by 81.7 percent year-on-year in 2021. The company also reversed the loss allowance of Rs.52.57 million on trade debts in 2021 booked in the previous years. Operating profit multiplied by a stunning 272.85 percent in 2021 which translated into OP margin of 10.4 percent. Finance cost also plunged as discount rate was reduced during the year. The bottomline posted net profit of Rs.2314.56 million in 2021 with NP margin of 8 percent and EPS of Rs.17.55.

In 2022, the topline posted a robust year-on-year growth of 30.81 percent. Locally, the off-take slid by 10 percent year-on-year due to uncertain economic and political environment as well as misuse of tax exemptions by FATA/PATA region players. Conversely, export volume grew by 9 percent year-on-year in 2022 on the back of improved access to the European region which counterbalanced low sales in Afghanistan and Srilanka on account of political turbulence in those territories. Historic high prices of steel coupled with depreciated Pak Rupee resulted in a 33 percent year-on-year rise in the cost of sales. Gross profit grew by 17.49 percent in 2022 but GP margin slipped to 12.3 percent. The company undertook rigorous cost control measures and pushed down its administrative expense by 9.77 percent in 2022, however, selling and distribution expense grew by 73.17 percent year-on-year due to higher exports sales volumes which pushed up the freight charges. Other income posted handsome growth of 209.26 percent in 2022 on account of dividend income from subsidiary company and robust exchange gain due to Pak Rupee depreciation while other expense moved down by 34 percent due to lower profit related provisioning, donations and business development expense. Operating profit expanded by 60.52 percent in 2022 and OP margin also ticked up to 12.8 percent. However, the joy proved to be short-lived as rise in finance cost due to high discount rate and added borrowings as well as high tax rate due to the imposition of super tax shoved the bottomline down by 6.86 percent year-on-year in 2022 to clock in at Rs. 2155.67 million. NP margin also plunged to 5.7 percent in 2022 while EPS was recorded at Rs.16.35.

After two consecutive years of topline growth, INIL’s topline was 29.24 percent down in 2023. Due to economic and political instability, shut down of auto industries due to import restrictions and slow construction and infrastructure-related activity; LSM shrank by 10.26 percent versus growth of 10.6 percent in 2022. Steel and iron industry also contracted by 4 percent in 2023 versus growth 16.6 percent in 2022. As a consequence, local sales volume dampened by 38 percent. Export sales didn’t impress either and underperformed compared to the previous year. Curtailed demand and sales volume reduced the cost of sales by 29.6 percent year-on-year which resulted in a rise in GP margin to 12.8 percent in 2023. Distribution expense shrank considerably because of lower freight charges on account of lesser off-take. Administrative expense inched up by a mere 1.96 percent in 2023 due to higher payroll expense on account of inflationary pressure. Other expense plummeted by 29.58 percent in 2023 due to lesser provisioning for WWF and WPPF. Other income slid by 5.28 percent in 2023 on the basis of lesser dividend income from associated company and lesser exchange gain. Operating profit declined by 4.63 percent year-on-year in 2023, yet OP margin climbed up to 17.2 percent. 46.54 percent higher finance cost was the result of high discount rate. The company managed its cash flows and working capital quite well during the year and didn’t require additional borrowings. This is evident in its strong liquidity position (see the graph of Liquidity ratios). The company’s gearing level also improved from 60 percent in the past six years to 55 percent in 2023. INIL’s net profit grew by 5.44 percent in 2023 to clock in at Rs.2272.94 million with EPS of Rs.17.23 and NP margin of 8.5 percent.

Recent Performance (1HFY24)

During 1HFY24, INIL’s net sales posted year-on-year rise of 28 percent. The trend of low sales volume continued and the company registered a trivial 3 percent rise in its sales volume during the period. Lackluster performance of construction, infrastructure and automobile sector due to prolonged import restrictions, high discount rate, Pak Rupee depreciation, sky-rocketed level of inflation as well as political mayhem prevailing in the country are to be blamed for the tamed demand during the period. Export sales were also lethargic due to global slowdown of developed economies. The company’s ability to pass on the onus of cost hike to its customers and expand into smaller urban centers and smaller markets resulted in 79 percent improvement in gross profit in 1HFY24 with GP margin climbing up to 15.3 percent in 1HFY24 from 10.9 percent during the same period last year. Lower sales volume resulted in 17 percent lower distribution expense in 1HFY24. Administrative expense, however, expanded by 25 percent in 1HFY24. Other expense mounted by 882 percent during the period may be on account of higher profit-related provisioning and exchange loss due to dampened export sales. Other income dropped by 62 percent during the period. INIL also booked loss allowance on trade receivables worth Rs.49.31 million during 1HFY24, up 21 times year-on-year. Operating profit rebounded by 8 percent during the period; however, OP margin lost its grounds and dropped to 13.1 percent in 1HFY24 from 15.5 percent during the same period last year. Finance cost tumbled by 11 percent year-on-year during 1HFY24 due to considerably lower outstanding loans. As a consequence, net profit enlarged by 13 percent year-on-year in 1HFY24 to clock in at Rs.864.95 million with EPS of Rs.6.56 versus EPS of Rs.5.79 in 1HFY23. NP margin ticked down from 5.9 percent in 1HFY23 to 5.2 percent in 1HFY24.

Future Outlook

Local sales which form the largest chunk of INIL’s total sales show no signs of recovery in near term due to external account vulnerabilities, high inflation, political chaos as well as low purchasing power of consumers and low public sector spending. Palestinian-Israel conflict which has spread until Red Sea may result in supply chain disruptions and export barriers to the EU and USA. The company may be able to muster sales by expanding its market reach into smaller markets and urban centers like it recently provided construction solutions to the building sector in Lahore. In this way, the company can diversify its revenue streams.