ISL: (Not) on a roll

Despite a decent 16 percent growth in its overall revenue, the flat steel manufacturer International Steels Limited (PSX: ISL) recorded a 39 percent decline in its bottom-line as gross margins shrunk. Predominantly used in construction, automotive and electronic sectors, ISL has been better positioned than many long steel players as demand for them entirely depends on construction and real estate. ISL’s demand has remained positive—in FY19, production of flat steel products according to PBS has grown by 3 percent. As a dominant player, ISL has been a primary supplier in this.

Nearly 5 percent of its revenues come from exports (FY18: 8%) which allow the company to remain slightly diversified market-wise. However, the good news ends here. Costs of production have increased faster than revenues. The company’s third quarterly report argued that “imports from China and Russia continued to increase at significantly lower prices putting pressure on domestic prices”. Meanwhile, input prices have made manufacturing more expensive, while the company incurred higher cost of imports due to exchange rate fluctuations and volatile steel prices. This made margins drop by 27 percent.

The company has kept its indirect expenses constant at 3 percent as a share of revenues by keeping tight control over its distribution and administration expenses despite rising overall inflation and higher fuel prices that has increased transport costs. Lower exports than last year may have curtailed distribution expenses a little.

The Central Bank has been tightening monetary policy to cool inflation down which has resulted in higher cost of financing for loan facilities at floating rates. Mark-up for the company’s short term borrowings and long term finances on account of recent expansions by conventional and Islamic bank are much higher. As a result, finance costs as a share of revenue grew from 1 percent to 2 percent. The company also paid a higher effective tax of 27 percent against 24 percent last year. The final drop in net margins of 47 percent resulted in an unexciting end to the fiscal year for ISL.

However, the company has still performed better than other companies in the manufacturing industry that are struggling to keep losses at bay, many failing to do so. The future is bleak as demand is expected to move down, not up; while costs are also going to be troubling.