International Steels Limited (ISL)

Brief introduction: International Steels Limited (ISL) is a subsidiary of International Industries Limited (IIL) and was incorporated in 2007 to manufacturer and sell flat steel products in Pakistan. The investment of $165 million investment with equity contributions from Sumitomo Corporation, JFE-Japan and the International Finance Corporation (IFC) helped the company kick off into a hi-tech manufacturing segment.
The company manufacturers cold rolled steel, galvanised steel and colour coated steel. The company has had an annual capacity of 500,000 tons of steel with a product mix of 100,000 tons for cold-rolled product, 350,000 tons for hot-dip galvanised and 50,000 tons for colour coated steel which are offered in coil or sheet form. The company also exports about 10-12 percent of its total sales to various international markets.
Group activity, company stakes and shareholders
ISL is a subsidiary of IIL that was established in 1948. (Read our brief recording on the holding company published on December 22, 2016). IIL was initially a trading company but 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. Aside from ISL, the group established IIL Stainless Steel Pvt Limited which locally manufactures stainless steel tubes; has stakes in Pakistan Cables Limited (PCL) that manufactures copper rods, wires and cables.
Back to ISL, the company got listed on the Pakistan Stock Exchange in 2011 and as at June 2016, IIL held majority of the stakes in the company-holding 56.3 percent of the shares. The initial investors Sumitomo Corporation holds 9 percent of the shares, International Finance Corporation holds 4.65 percent of the shares while JFE Steel Corporation holds 4.7 percent of the shares. .
Expansion and investments
ISL has its own electricity power generation facility that is 19.2 MW gas fired co-generation power plant that generates electricity for its cold rolled steel and galvanised steel production units. The excess electricity it produces is sold out to K-Electric under an agreement that was signed in 2007 and is valid for 20 years. This helps the company generate an additional income.
The company also has an effluent treatment plant that helps in collection, neutralisation and filtration of the entire solvent based wastages generated during the process of production and makes them re-usable. The used hydrochloric acid from the strip pickling line is re-generated so that 98 percent is re-used and only 2 percent neutralized is discharged, according to an explanation offered in the company's annual reports. The reverse osmosis generates over 100m3/hr of water to meet industrial requirements which allows the company to not rely solely on Karachi's over loaded water system.
This investment in essence reduces industrial waste, improves water availability for local residents by makes industrial water reusable and helps to reduce water usage.
During the outgoing year, ISL successfully completed capacity enhancements for the conversion of its compact cold rolling mill to a twin-stand reversing mill, and added a second galvanising line while also commissioned a color coating steel line. The expansion was carried out at an approximate cost of Rs 3 billion and has enhanced ISL's capacity for cold rolling mill capacity from 250,000 tons to 500,000 tons, increased galvanising capacity from 150,000 tons to 400,000 tons. This investment in expansion will go a long way for the company's future in the steel industry.
Operational and financial performance
ISL may soon become a force to reckon with but the journey to getting on the path to growth was not with hurdles. Reportedly, the company was producing around 166,000 tons of steel products in FY11 and FY12 but by FY14, production went up to over 280,000 tons, growing by 70 percent. Capacity utilisation also went significantly up and the expansion during FY16 has come just in time. Production reached over 370,000 tons in FY16, this was a 55 percent increase compared to the last fiscal and it included approximately 118,000 tons of cold rolled products and 253,000 tons of galvanised steel
The company reached its peak revenues in FY14 clocking at Rs 17.6 billion, up from Rs 3.6 billion just three years prior in FY11. This is a massive jump. However, production went down in FY15 and so did revenues. The company earned sales of Rs 20.5 billion at historic high production levels partly due to falling international steel prices. The steel dumping from China and under-invoiced steel made the ISL's brand more expensive and prices had to be cut down, according to an explanation provided in the annual report.
The sales to K-electric declined during FY16 due to increased internal consumption as a result of higher output.
Over these years, gross margins have gone up from 9 percent to 14 percent between FY11 and FY16-FY16 being the year margins peaked. These are historic high margins and speak for the company's growth in such a little time. With greater cost efficiency and productivity, margins will further be squeezed. The company was in losses until FY12 and bounced up with an after tax profit of Rs 363 million in FY13, jumping to Rs 1.2 billion in FY16.
Snapshot of Q1FY17 and outlook
In Q1FY17, already massive improvements are evident. Sale revenues are up by three times from Rs 2.8 billion to Rs 6.5 billion. Margins are up from merely 5 percent to 16 percent between the first quarters of FY16 and FY17. The company earned a loss in the first quarter last fiscal but during FY17, the company promisingly boasted after tax profit of Rs 565.7 million; profit margin moving up to 9 percent. Finance cost was largely limited during these two time periods.
The expansion for the company has nearly doubled; production is going up while the kick-off of this fiscal looks in good spirits. With demand forecasts for steel in mind given the growth projections in the construction sector driven by housing and infrastructure overhaul in the next five years, the company is in a sweet position to enjoy the fruits being one of the few large private sector companies that are stable enough and have strong investments in place.
With profit more than tripling between FY15 and FY16, the company's stock also skyrocketed upward with investor confidence in ISL moving up. The stock outperformed the index during the last few months by a wide margin and has been doing phenomenally well. It was a top performer on the stock exchange when the year 2016 closed down.
After its record performing outgoing year, there is plenty more to come for ISL. The anti-dumping duty is in place for dumped steel from China, the company will be better placed to achieve greater capacity utilisation now more than ever and maximise its production driven by the industry demand dynamics.

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International Steel Limited

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Rs (mn)                           Q1FY17    Q1FY16     YoY

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Sales                            6,586.2   2,862.4    130%

Cost of Sales                    5,522.2   2,733.1    102%

Gross Profit                     1,064.0     129.3    723%

Distribution cost                   44.4      36.5     22%

Administrative cost                 65.6      34.5     90%

Finance cost                       122.8     225.2    -45%

Other expenses                      86.7      70.3     23%

Profit (loss) before taxation      775.9   (205.8)    477%

Taxation net                       210.2     (3.3)

Net profit (loss) for the period   565.7   (202.6)    379%

Earnings per share (Rs)              1.3     (0.5)    377%

GP margin                            16%        5%

NP margin                             9%       -7%

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Source: Company accounts

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5% or more shareholding (as at June 2016)     No         Shares         %

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General public                              1887     56,683,152   13.0306

International Industries Ltd.                  1    245,055,534   56.3346

Sumitomo Corporation                           1     39,477,657    9.0753

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Source: Company accounts

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Capacity and utilisation

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                               FY16      FY15

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Capacity

Galvanising                 462,000   150,000

Cold Rolled Steel           550,000   250,000

Production

Galvanising                 252,910   169,167

Cold Rolled Steel           370,811   238,640

Estimate of utilisation

Galvanising                     55%      113%

Cold Rolled Steel               67%       95%

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