International Steels Limited

International Steels Limited (PSX: ISL) was set up in 2007 as a public limited company under the repealed Companies Ordinance, 1984 (now, Companies Act, 2017). It is a subsidiary of International Industries Limited. ISL manufactures cold rolled, galvanized and color coated steel coils and sheets.

Shareholding pattern

As at June 30, 2020, International Steels Limited is primarily owned by its sponsors/holding company as a little over 56 percent shares of the company are held under this category. This category solely includes International Industries Limited. Some 9 percent shares are with the associated company, that is, Sumitomo Corporation, while the local general public owns 12 percent shares. The directors, CEO their spouses and minor children hold about 4 percent shares in the company. roughly 4 percent shares are with “strategic investors” and mutual funds. The remaining 11 percent shares are with the rest of the shareholder categories.

Historical operational performance

International Steels has witnessed a rising topline for a large part of nearly one decade, whereas profit margins have been on a gradual decline after reaching a peak in FY17.

The year FY17 was a decent year for the economy with one of the highest GDP growth rates of 5.3 percent; iron and steel products saw the highest growth at 16.58 percent, compared to last year’s negative growth of 7.48 percent; the former was due to greater construction activities that led to an increase in demand for steel and allied products. For International Steels, revenue was higher by more than 64 percent; volumetrically, flat steel products saw a 12 percent growth while overall volumes were higher by 35 percent. Moreover, during the year, the company completed a debottlenecking project for pickling line that took cold rolling capacity to 550,000 tons. Cost of production was lower at 82.5 percent of revenue, thereby improving gross margins. This also reflected in the net margin that was also supported by a reduction in finance expense due to lower mark up on borrowings- a result of better cash flows. Thus, net margin was recorded at one of the highest at 9 percent for the year.

Pakistan’s GDP was even higher in FY18 at 5.8 percent, with industrial recording a growth rate of 5.8 percent, and LSM at 6.13 percent. Construction activities continued to positively affect demand for steel and allied products. For the company, topline growth stood at a little over 41 percent, whereas volumes increased by 10 percent. The exaggerated topline growth with a 10 percent growth in volumes was due to increase in global steel prices. During the year, it also completed a project for new Compact Cold Rolling Mill that took cold rolling capacity to 1 million tons. Increase in cost of production as a percentage of revenue was marginal at 84 percent that reduced gross margin to 16 percent. Net margin, however, was slightly higher year on year at 9.17 percent due to a lower tax expense.

The year FY19 began with the general elections, whereas fiscal indicators worsened that brough GDP rate to 3.29 percent for the year. Demand for steel products was also adversely affected due to slower economic activity, decline in automobile production. This led industry players to lower production leading to the industry’s growth to stand at a negative 11 percent. For the company, topline growth was at nearly 21 percent; galvanized sales volumes declined by 11 percent, while sales volumes for cold rolled products increased by almost 12 percent. Cost of production, however, went up significantly to make up nearly 89 percent of revenue. This was due to higher international steel prices along with exchange rate fluctuation and higher interest rates. Thus, gross margin dropped to 11 percent while net margin was further worsened to 4.6 percent due to an escalation in finance expense. This was attributed to project financing obtained in addition to higher interest rates.

The first half of FY20 was noted by inflationary pressures that kept spending power low. This led to depressed economic activity. The second half of the year was affected by the outbreak of Covid-19 pandemic that resulted in a strict lockdown. In this backdrop, iron and steel industry saw a negative growth of 8 percent. The company’s topline was lower by 16.4 percent year on year. Sale volumes also fell; 23 percent for galvanized sales and 17 percent for cold rolled products. Cost of production also reached its highest of more than 91 percent of revenue, shrinking gross margin to almost 9 percent, while net margin was 1 percent. Finance expense continued to increase due to currency depreciation against the USD “resulting in higher financing requirements”.

Quarterly results and future outlook

For the first six months of FY21, revenue was higher by 32 percent year on year. Same period last year was noted by inflationary trends, lower economic activity and hence lower demand. With economic activities resuming after the strict lockdown, revenues improved. Cost of production was also lower year on year, improving gross margins. Profitability was also supported by higher other income; thus, net margin was recorded at 8.3 percent as compared to nearly 2 percent in 1HFY20.

With higher capacity, and a dedicated service center at Port Qasim area of Karachi, the company hopes to capture local and international markets.