International Industries Limited

Established in 1948, International Industries Limited (PSX: INIL) manufactures and markets galvanized steel pipes, precision steel tubes, API line pipes, polymer pipes and fittings. It has two manufacturing facilities located in Karachi and Lahore.

Shareholding pattern

As at June 30, 2021, over 39 percent shares are owned by the directors, CEO, their spouses and minor children. Within this, the directors and spouses hold 29.3 percent shares. The local general public holds 28.5 percent shares followed by over 8 percent held in each of the following: public, private and other companies, and government financial institutions/NIT/NBP related companies. Another 6.5 percent shares are held in modarabas and mutual funds, while the remaining 8.8 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline with the exception of a few years, while profit margins in the last six years particularly have followed a declining trend. Profit margins decreased between FY17 and FY20, before improving again in FY21.

In FY18, the company posted the highest revenue growth rate of over 55 percent with topline nearing Rs 26 billion in value terms. Gross sales volumes stood at 270,000 metric tons with domestic sales volumes significantly higher year on year. This was attributed to greater infrastructure and project related spending. Demand for commercial grade CR tubing was created on the back of growth in two-wheelers, three-wheelers and general fabrication requirements. But the increase in production cost to over 87 percent of revenue, from last year’s 82.46 percent, reduced gross margin to 12.75 percent. With a reduction in other income, in addition to a rising finance expense, net margin also reduced to 6.1 percent, compared to 11 percent in FY17.

Growth in FY19 shrunk significantly as it was recorded at 0.2 percent. Large Scale Manufacturing (LSM) was lower by 2.9 percent. Gross sales volumes for the company were lower by 19 percent. Demand for commercial grade CR tubing and black pipes reduced due to automotive, construction and real estate. These three also affected the overall iron and steel industry. Higher production cost at 89 percent continued to contract gross margin that was recorded at 10.9 percent. With significant support from other income that was propelled due to dividend income, net margin for the year was flat at 6 percent.

Revenue in FY20 fell drastically as it posted the biggest contraction by nearly 27 percent. LSM also declined by more than 10 percent. Demand was adversely impacted due to high cost of capital, reduction in PSDP and requirement of CNIC on purchases exceeding Rs 50,000. For the company, volumes were also lower to 143,000 MT with domestic sales witnessing a reduction by 25 percent. This was attributed to a general economic slowdown that was worsened by the onset of Covid-19. Export sales were also affected by instability in international steel prices as well as slowing global trade. Moreover, cost of production escalated to nearly 93 percent of revenue, reducing gross margin to an all-time low of 7.2 percent. With other income also reducing and finance expense continuing to make a larger portion of revenue at 6.5 percent, the company incurred a net loss for the first time of Rs 694 million.

Revenue in FY21 increased by 52.6 percent nearing Rs 29 billion in value terms. Sales volumes increased to 190,000 MT. Moreover, domestic sales volumes were higher by 25 percent. Majority of the growth was attributed to improvement in CR tubes sales that are used in automotive, furniture and general fabrication segments. With cost of production reducing to over 86 percent of revenue, gross margin improved to 13.7 percent. Other income again crossed Rs 1 billion, allowing operating margin to post a substantial increase to over 10 percent. Net margin was also considerably better at 8 percent with bottomline recorded at an all-time high of Rs 2.3 billion.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by over 64 percent year on year. Of this, domestic sales revenue increased by 47 percent year on year due to higher international steel prices. On the other hand, volumes have been more or less flat due to subdued demand commercially. Moreover, export revenue and volumes have been better due to demand for specialized products from key export destinations. This trend is expected to continue. With production cost reducing to 86.5 percent compared to over 91 percent in 1QFY21, in addition to substantial support from other income at nearly Rs 2 billion, net margin was notably higher at almost 20 percent versus 1.3 percent in 1QFY21.

Revenue in the second quarter was higher by nearly 19 percent, again largely on the back of better prices, while volumes remained subdued due to lower commercial demand. Exports, however, continued to increase as per expected trend. However, production cost climbed to over 90 percent of revenue. With other income also reverting to usual levels, net margin was lower at 1 percent versus 13.2 percent in 2QFY21. Third quarter also saw higher revenue year on year by over 17 percent witnessing similar trend as the previous two quarters. Again, with production cost rising to over 90 percent, net margin in 3QFY22 was lower at 5.4 percent versus 11.7 percent in 3QFY21. While there exists some opportunities on the export front, subdued demand, rising policy rate and currency devaluation pose certain challenges for the company and industry, alike. Topline has been rising due to rising steel prices. The latter is due to China’s economic slowdown, supply bottlenecks and Ukraine-Russia conflict. But rising costs threaten future profitability.