International Industries Limited (IIL) is engaged in the business of producing and marketing 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 equity of Rs 5 billion.
Domestically IIL has a market share of roughly 19 percent; the rest is produced by more than 50 other manufacturers. The company has also found markets outside Pakistan and is presently exporting its pipes to more than 30 countries all over the world.
Highlights: A record top line The northwards sales trend that the Company has been experiencing for over some period continued in FY11, as net sales grew by almost 19 percent and reached a record level of Rs 15.9 billion. The volumetric growth stood around 5 percent as total volume exceeded 194,000 metric tons.
Export sales which constitute roughly 28 percent of the total sales grew by 42 percent in FY11 compared to FY10. A total of 63,000 tons of pipes valuing more than $60 million were exported in FY11, as the Company focused on Afghanistan and Sri Lanka. Over the same period local sales saw a modest growth of 10 percent.
Segment wise the plastic segment saw the largest increase; roughly 44 percent in FY11 compared to FY10. Strong demand from gas companies, sewage and water boards were the main factors behind this spike in demand. However, being a mere 6 percent of the total sales, this increase didn't have a huge impact on the overall sales.
The steel pipes segment grew by 16 percent. Leading the growth was the cold rolled steel strip type whose sales rose by 14 percent in FY11 compared to FY10. On the other hand, sales of GI pipes, which are mainly used in making steel poles, were badly hit due to the slowdown in construction activities in the northern areas due to floods. In FY11 the sales for GI segment were 10,000 tons less than FY10.
Profitability Despite record high sales, the gross margin for the Company weakened by 300bps and the upward trend in gross margin that the Company had experienced in FY10 could not continue. The primary reason behind the decline in gross margin was spike in the prices of zinc and steel, the main raw materials used in making pipes.
The operating margin for IIL also worsened in FY11, the depressed operating margins reflect both the carry over effect of worsened gross margins and an increase in the administrative expenses owed mainly to salary increases.
The net margins fell from 7.6 percent in FY10 to 2 percent in FY11. The sizable increase in mark-up on short- and long-term borrowings inflated the finance cost by 343 percent which led to a thinned out bottom line. Primarily the higher finance cost is owed to long-term investment in International Steels Limited and Pakistan Cables Limited.
What's driving steel? As steel is the main raw material used in manufacturing pipes, any change in the steel industry directly affects the Company. Hence, understanding the dynamics of steel is important. The BRIC countries have been the main drivers of steel prices over the past couple of years and despite slowdown in the developed economies their handsome growth rate is exerting an upward pressure on the price of steel.
The supply side also has a lot to do with the spike in steel prices. Over the past year or so steel prices have skyrocketed mainly due to the shortage of supply from the main raw material providers, Brazil and Australia. Resultantly, the price of iron ore and coking coal; the main raw materials used in manufacturing, steel surged by approximately 37 percent and 41 percent in FY11, compared to FY10. The overall effect of the increase in raw material prices was a 26 percent increase in price of steel in FY11 compared to last year.
The increase in demand and simultaneous decrease in profitability (due to higher input costs) was an industry wide phenomenon that was experienced all across the construction material industry in FY11.
Short-term solvency A decline in the short-term borrowings led by a decrease in the short-term running finance under export and import schemes, skimmed total current liabilities. The decline in raw material in hand and in transit, resulted in a decrease in the total current assets. Overall the current ratio rose slightly from 1 in FY10 to 1.1 in FY11. However, despite this improvement, the current ratio is still below the post slowdown level of 1.17.
Efficiency The operational efficiency of the Company has worsened over the past three years, reflected by an increase in the number of days in the operating cycle. The Company's ability to collect its receivables, after a very bad FY10, improved in FY11 as the debtor's turnover fell from 37 to 36 days. However, the ability of the Company to convert its inventory into sales worsened as the number of days of inventory rose from 198 in FY10 to 226 in FY11; thus deteriorating the overall efficiency.
Outlook As far as sales are concerned the top line is expected to grow in FY12. The profitability is also expected to improve, as the growth rate in the GDP of BRIC countries is expected to slow down a bit, which in turn means that the growth in steel demand would also slow down and would cause an overall decrease in prices of raw materials. The decrease in prices of iron ore can already be seen.
On the other hand, any decrease in GDP growth also means that the spending would slow down and construction activities would also whither. However, in IIL's case, the Company is expecting an increase in export sales of steel pipes to Afghanistan, and increase in rehabilitation work in Pakistan. In addition the Company has already received large orders for plastic pipe and is expecting a better FY12.
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International Industries Ltd
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Production Capacity (MT)
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FY11 FY10
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Pipe 312000 312000
Galvanising 150000 150000
Cold rolled Steel strip 70000 50000
P.E pipe 10000 8000
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Actual production (MT)
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FY11 FY10
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Pipe 169799 182144
Galvanising 76817 92366
Cold rolled Steel strip 50278 36768
P.E pipe 5840 5181
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International Industries Ltd
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Steel Plastic
segment segment
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FY11
Sales 14830 1019
COGS 13113 924
Gross profit 1717 94
Gross margin 12% 9%
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FY10
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Sales 12766 705
COGS 10620 628
Gross profit 2145 76
Gross margin 17% 11%
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International Industries Limited
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FY11 FY10 FY09
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Profitability ratios
Gross ratio % 13.5 16.5 9.5
Net margin % 2 7.6 3
ROA % 1.2 5.5 3.4
Liquidity ratios
Current ratio 1.02 1 1.07
Quick ratio 0.4 0.3 0.61
Activity ratios
Inventory turnover days 226 198 73
Debtors turnover days 36 37 28
Fixed asset turnover times 1.4 1.4 2
Market ratios
Price earning times 18.8 6.7 12.3
Dividend Payout % 190 58.4 60
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Source: Company accounts
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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