ISL: Low on enthusiasm

Considering the year it has been, International Steel’s (PSX: ISL) financial performance for the year is fairly decent bragging a stellar top-line growth of 31 percent which was single-handled knocked down by ballooning costs.

Certainly, FY22 has been a daunting 12 months for the world with economies still reeling from the pandemic outbreak and the ensuing supply chain and energy crises; then getting hit by a raging war between Russia and Ukraine that caused new fissures in global trade flows which in turn caused prices hurtling forward.Inflation has been the order of the day and Pakistan has been in the thick of it. Due to international dynamics coming into play due to the war and re-emergence of covid in China, commodity and most fuels saw prices spiral upward. Hot-rolled coils (HRC) which is the main input used to make cold-rolled coils (CRC) is completely imported by flat-steel manufacturers in Pakistan and saw its value experience a sizeable bump.

Meanwhile, the dramatic depreciation of rupee during the year also caused havoc making imports that much more expensive. Though costs per ton sold cannot be estimated (as volumetric data for ISL is not accessible), costs of sales grew 40 percent of the company which offset the gains made in revenues. ISL along with other steel makers have been raising prices to pass on the cost impact to customers which resulted in the strong revenue growth, but prices were evidently not raisedenough to match costs.

This caused margins to drop to 14 percent from 19 percent last year. Despite overheads and finance costs remaining stable—at 4 percent and 1 percent respectively—of revenue, ISL’s earnings (pre-tax) declined 22 percent and by 28 percent in after-tax profits. Overall, FY22 was a shaky end to an equally shaky beginning, and upcoming year is only going to be tougher.

Though HRC prices started declining to pre-war levels in July, the dollar and rupee are playing a game of hide and seek. Consumers are battling a bout of inflation that is showing no signs of reprieve which should eventually dampen overall demand especially for goods not in essential use. While steel makers have decreased prices, demand may remain dull or worsen which will have a negative impact on earnings even if commodity prices soften.