INTERNATIONAL INDUSTRIES LIMITED - Analysis of Financial Statements Financial Year 2004 - Financial Year 2008
International Industries Limited, a top 25 KSE Listed Company; was incorporated in 1948 as Sir Sultan Chinoy & Co Ltd., a trading company which ventured into the business of manufacturing welded steel pipes and tubes in 1965. IIL is now in the business of producing and marketing of GI Pipe, steel tubes and pipes, API line pipe and polyethylene line pipes throughout the world.
Major consumers of IIL products include auto industry, oil and gas, water supply and sanitation, power and energy, telecom, builders, steel industry and NGOs. The company continues to remain the market leader in all segments within the country having a market share of about 50% in GI Pipe and 40% in CR Tubes. The company strives to manufacture and sell products of the highest international quality and build on its position as the market leader, with sales growing from Rs 15 million in 1976 to more than Rs 11.0 billion in the fiscal year 2006-07.
The company has a manufacturing capacity of 300,000 tons of small diameter steel pipes, which are sold in over 30 countries across the world. Till today, the company remains the leading exporter of welded steel pipes and tubes from Pakistan. It is certified to various standards of QMS, EMS, OHSAS 18001:1999; and has API Accreditation to Q1-5L and Q1-15LE and the exponential growth of its exports is a strong endorsement of its resolve to maintain the quality of its products comparable to those manufactured internationally.
FINANCIAL PERFORMANCE (FY04-FY08) International Industries Limited has exhibited a consistent growth in overall sales over the years despite the upward pressure on increased zinc and steel prices. Total sales in the fiscal year 2007-08 almost exceeded 180,000 tons with export sales showing recovery compared to FY07 when there was a 1% decrease in sales volume primarily due to increased competition from China in the European markets. Hence the company decided to withdraw from these markets and concentrated on the near home markets of South Asia and the Middle East. In FY08, the company's exports increased by 24% to its highest ever level of 50,000 tons.However, the domestic sales, which accounted for around 72% of the overall sales for FY07-08, declined by 2% due to decrease in the sales of galvanized pipes in local market.
The company performed well despite rising freight costs and steel prices, which pushed up the company's costs and negatively impacted its profits in the first half of FY08. But the company showed prudence and purchased steel in advance at economical prices in the latter half of the year. The company also incurred an exchange loss of Rs 1.37 million due to depreciation of rupee against the US dollar. In FY08, the company earned a profit after tax of Rs 705 million, which is 14% higher than Rs 612 million earned in FY07. Higher profits resulted from volumetric growth and were further boosted by other operating income on the back of gain on disposal of available for sale securities and income from power generation.
Overall, the gross margin remained flat whereas net margin declined slightly in FY08 compared to FY07 as the selling (including freight forwarding) costs rose by 23% due to increased fuel prices and administration expenses on account of increase in salaries and appointment of additional staff to run the plants added. Furthermore, ROA and ROE registered a decline in FY08 vis-a-vis last year. Returns on assets decreased slightly because of lower NI growth (14%) compared to the growth (of 24%) in the company's assets base (due to the company's planned capital expenditure). Return on common equity declined considerably because of a 62% increase in equity in FY08 backed by increase in paid-up capital and reserves of the company.
The current ratio of FY08 increased to 1.19 from 1.17 in FY07. This is because of higher growth in current assets backed by an extraordinary increase in the cash and bank balances of IIL from Rs 4 million in FY07 to Rs 28 million in FY08. However, steel prices have fluctuated during the past six months so much so that steel price doubled between the beginning and end of the financial year and this could exert pressure on the liquidity of the company.
Inventory is a major portion of IIL's current assets and thus without this less liquid asset we get a more realistic picture of the company's short-term liquidity position. Quick ratio declined against FY07 level of 0.51 to 0.34 in FY08. This is because the quick assets of the company decreased from Rs 2.5 million in FY07 to Rs 1.8 million. Quick assets were lower, despite major increase in cash and bank balances and trade debts. This is because of short-term investments, which were prime driver behind the increase in QR of FY07, were not made by the company in FY08.
There has been an increase in both ITO and DSO in FY08 by 14 and 8 days respectively, thus increasing an overall operating cycle to 181 days from 159 days during FY07. This is due to higher trade debts and inventory with regard to sales in FY08 compared to previous years. The rising trend in the company's days sales outstanding meant that the company is following an easy credit policy to encourage sales. The company has developed a formal approval process whereby credit limits are applied to its customers. The management continuously monitors the credit exposure towards the customers and makes provision against those balances considered doubtful of recovery.
Owing to growing assets base due to increased capital expenditure, total asset turnover ratio had declined in FY07. In FY08, the TATO improved slightly because of the net sales of the company registered a relatively higher growth than the assets base. In contrast the sales/equity ratio decreased because of higher equity issuance than sales growth.
International Industries Limited has an equity base of over Rs 3.8 billion. The company's D/E and the LTD/E ratios declined in FY08, despite additional borrowing for the planned capital expenditure, because the equity base of the company widened in this fiscal year, mainly due to the stock dividends (bonus issues), coupled with retained earnings and reserves growth. This is further augmented by the trend of debt ratio, which has decreased from 73% in FY07 to 64% in FY08. This means that the company has now a relatively smaller portion of total assets financed by creditors.
Amid rising interest rate regime, one can clearly see a drastic impact on the company's interest covering ability which has declined from 11.7 times in FY04 to only 3.03 times in FY08. This means that company needs to further improve its operating profits so as to offset the rising mark-up charges on its redeemable capital and short term borrowing, which have increased considerably in the later years owing to the high-interest rate regime.
Overall the stock price of the company has been volatile and has not outperformed the 100-idex benchmark since 2004. However, the P/E multiple has surged in FY07 and FY08 on account of lower EPS, which in turn is on the back of higher shares outstanding (due to stock dividends). The BVPS of the company has increased in FY08 owing to higher equity base than o/s shares. The DPS though has declined over the years, it has been regular showing good returns and prudent dividend policy of IIL.
FUTURE OUTLOOK
The company has many ongoing expansion plans which may expand its sales in the future. The company's downstream project comprising of 250,000 tons per annum cold rolling mill and a 150,000 tons per annum metal coating steel plant is planned to be located at Landhi, Karachi. This project will be turned into a subsidiary as all assets and liabilities of this project including an 18mw gas fired power plant already constructed and operational at that plot will be separated from International Industries Limited.
Initially it will be a wholly owned subsidiary of IIL, but later it will have a 55% stake in this subsidiary. The subsidiary would be a public limited company listed on the stock exchanges in Pakistan. This project will cost Rs 8 billion of which Rs 4 billion will be financed through equity and the other half through debt. So far, the company has been financing this project and later on the company will generate additional capital by issuing ordinary shares. The company has been making huge capital expenditure to expand its polyethylene pipe division alongside the proposed cold rolled and metal-coated steel sheet project. This will increase the capacity of the company and enable it to meet future demand.
The demand of company's products is expected to rise in the future, both domestically and internationally as many countries are investing in their infrastructure, housing, transport and industrial sectors. IIL is the leading exporter of welded steel pipes and tubes from Pakistan and is selling its products in all continents. By the promising export sales in FY08 the company can expect growth in its international sales in the future as well. However, it will depend on how prudently the company deals with competition from new market entrants, record high zinc prices, rising prices of steel, inflation, rising interest rates and changes of tariffs. In future, the management needs to be cost conscious and monitor and control expenditure to avoid the margins from being eroded.
Considering the company's ability to maintain its market leadership and performance standards, one can expect an overall positive outlook.
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International Industries Limited - Key Ratios
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PROFITABILITY FY04 FY05 FY06 FY07 FY08
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Gross profit margin 19.90% 14.28% 18.47% 16.68% 16.62%
Profit margin 8.70% 5.25% 6.95% 6.32% 5.84%
Return on Asset 9.27% 7.55% 10.17% 7.13% 6.64%
Return on Common Equity 26.91% 21.79% 26.68% 26.17% 18.61%
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LIQUIDITY RATIO FY04 FY05 FY06 FY07 FY08
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Current Ratio 1.17 1.19 1.21 1.17 1.19
Quick Ratio 0.29 0.25 0.49 0.51 0.34
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ASSET MANAGEMENT FY04 FY05 FY06 FY07 FY08
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Inventory Turnover(Days) 171 133 96 125 139
Day Sales Outstanding (Days) 35 26 28 34 42
Operating cycle (Days) 206 159 125 159 181
Total Asset turnover 1.07 1.44 1.46 1.13 1.14
Sales/Equity 3.09 4.15 3.84 4.14 3.19
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DEBT MANAGEMENT FY04 FY05 FY06 FY07 FY08
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Debt to Asset 66% 65% 62% 73% 64%
Debt/Equity (Times) 1.90 1.89 1.62 2.67 1.80
Times Interest Earned (Times) 11.71 5.88 5.02 3.20 3.03
Long Term Debt to Equity(%) 18% 19% 14% 45% 30%
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PER SHARE FY04 FY05 FY06 FY07 FY08
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Earning per share 24.13 8.72 12.47 10.77 8.47
Price earning ratio 6.76 12.05 9.49 13.76 14.30
Dividend per share 10.00 3.75 5.00 3.75 2.50
Book value 89.65 40.01 46.73 41.15 45.51
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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