New Investment Opportunities

In early March 2011 International Steels Limited (ISL) announced the raising of almost Rs 3 billion rupees ($35 million) through Public Offering. The company's book building process was carried out on April 12, 13 and 14, 2011 while the Initial Public Offering (IPO) is marked for May 3 & 4, 2011.
ISL is an Rs 8.7 billion steel manufacturing facility: the International Finance Corporation (IFC), Sumitomo Corporation of Japan (Sumitomo) and JFE Steels (Japans largest steel producer (JFE) have already invested in ISL, underlining its strategic importance in the industry. The company is the largest private investment in the value-added flat-rolled and coated steel industry in Pakistan.
ISL offers an opportunity to tap into Pakistan's economic growth and "demographic dividend" through the steel sector, currently in its nascent stages. Pakistan's per capita steel consumption, which is largely unorganised, is estimated at 38-40 kg which is significantly lower than the regional average of 207.8kg per capita and world average of 181.5kg per capita (Source: World Steel Association, 2010). Steel consumption in neighbouring countries is far higher - as exemplified by India at 47.8 kg, China at 405.2 kg and Thailand at 218 kg. These figures simply highlight Pakistan's potential to increase consumption manifold.
Estimated domestic demand for 'Cold Rolled Coils' (CRC) - a major steel product - exceeds 500,000 tons; out this, approximately 110,000 tons is met through domestic production (by Pakistan Steel Mills, "PSM" & IIL) with the remainder is imported. For 'Hot Dipped Galvanised Coils' (HDGC), another main steel product, estimated demand is 300,000 tons, - with just 10 percent catered to through domestic production (30,000 tons by PSM). Again, the rest is met through imports.
ISL is ideally placed to take advantage of the wide-open gap between domestic demand and supply: its CRC capacity of 250,000 tons annually enables the company to fill up a significant part of the total national requirement for this product. HDGC is a further value-added product from CRC and ISL intends to produce and sell 150,000 tons of HDGC. The current import focused scenario for CRC and HDGC exposed buyers to cumbersome inventory management and exchange rate fluctuations.
The 3-4 months time lag between order and delivery requires huge amount of cash deployment in form of inventories; with ISL's added domestic capacity buyers will be able to reduce inventories to the 5-7 days lead time level thus reducing the working capital requirements, customer service levels will appreciate and exchange risk will be minimised.
International Industries Ltd (IIL), ISL's Principal Sponsors among Pakistan's leading manufacturers of GI Pipes, Steel Tubes and Pipes, API Line Pipes and Polyethylene Line Pipes. IIL has an excellent track record in building successful projects in the steel and cable industries: the company is one of the pioneers in Pakistan's steel and pipe industry. ISL will leverage the market reputation of its sponsors brand name comfort, and also benefit from the astute industry experience of its parent company in managing operations - leading to cost efficiencies.
Sumitomo's participation in ISL delivers expertise in maintaining the highest quality standards, and in cost management, inventory procurement and resource management. The 32-acre facility in Landhi, Karachi is equipped with state-of-the-art manufacturing technology. The facility with its own 19MW plant ensures uninterrupted production of prime quality products at maximum efficiency levels and is comparable to any top rated steel plant in the region.
A distinctive feature is the availability of additional infrastructure that is civil works and machinery to facilitate future expansion. The machinery has been designed with foundations and other provisions to add a second rolling stand and increase cold rolling capacity to 400,000 tons annually. The unit's current capital cost with annual cold rolled capacity of 250,000 tons is USD 400/ton; future expansion by a further 150,000 tons per annum is not expected to cost more than USD 100 per ton. This will enable ISL to benefit from lower overhead cost and thus increased shareholder value.
Both ISL and IIL will experience similar economies as mentioned above in terms of purchases. Increase in purchase from existing buyers will enhance the negotiating power of the two group companies thereby making them eligible for supplier's credit, volume discount and a substantial decline in transportation cost.
Further, IIL is also expected to be a potential CRC buyer for its CR tubing products. Annual demand expected from IIL is up to 40,000 tons - representing 40 percent of total envisaged CRC output. ISL places strong emphasis on recruiting and retaining the best professionals who are central to its business model. The management team boasts exemplary industrial backgrounds from top-tier institutions across the world. Further, the sponsors, IIL, have a record of over 45 years in the steel industry enabling it to better navigate through the business.
Apart from IIL, the Group also holds substantial interest in Pakistan Cables (PC). Historic performance of the two shares depict that on an average of last 10 years, dividend payout ratio for investors has been more than 30 percent in the case of IIL and PCL, against a 27 percent return for KSE 100 Index. Keeping in view the group's history in delivering successful returns, investors may expect similar returns for ISL.