International Industries Limited

International Industries Limited (PSX: INIL) was incorporated in Pakistan in 1948. With an annual capacity of 817000 tons, the principal activity of the company is the manufacturing and sales of galvanized steel pipes, API line pipes, precision steel tubes as well as polymer pipes and fittings. Besides serving the local market, INIL has a footprint in 60 countries across six continents.

Pattern of Shareholding

As of June 30, 2022, INIL has a total of 131.881 million shares outstanding which are held by 5470 shareholders. Directors, CEO, Sponsors and their family members constitute the largest shareholding category with a stake of 40.88 percent. This is followed by local general public holding 28.63 percent shares of INIL. Government financial institutions, NIT and NBP related companies account for 11.16 percent shares of INIL while public, private and other companies own 9.56 percent shares. Banks, DFIs and NBFIs hold 4 percent shares of INIL followed by insurance companies with 2.23 percent shares. 1.94 percent shares of INIL are held by Modarbas and Mutual Funds and 1.13 percent by associated companies. The remaining shares are held by other categories of shareholders having less than 1 percent stake in the company.

Performance Trail (2018-23)

The topline and bottomline of INIL shows a mixed pattern over the years. The topline slid in 2019 and 2020 and then rode and upward trajectory thereafter. Conversely, the bottomline posted a year-on-year growth only in 2021. In all the years under consideration, the bottomline kept shrinking with a net loss reported in 2020. Margins also follow the similar trend as the bottomline whereby they continued to drop until 2020, recovered in 2021 and then again dipped in 2022. The detailed performance review of each of the year under consideration will provide the underlying details behind the journey

INIL posted a marginal downtick of 1 percent year-on-year in its topline in 2019 which came on the back of a drop in export sales while local sales performed better than the last year. The cost grew by 2 percent year-on-year which pushed down the gross profit by 20 percent year-on-year while GP margin also plunged to 10.9 percent in 2019 from 13.4 percent in 2018. Operating expense and other expense inched down in 2019 while other income rose due to exchange gain. This improved the operating profit by 16 percent in 2019. OP margin also climbed to 11.6 percent in 2019 from 9.9 percent in 2018. Finance cost magnified by 109 percent in 2019 on account of upward revision in discount rate as well as high short-term borrowings. This pushed down the bottomline by 0.5 percent in 2019; however, NP margin more or less remained intact at 6.1 percent in 2019.

The topline took the strongest hit in 2020 whereby it nosedived by 27 percent year-on-year due to the lockdown imposed on account of COVID-19 which badly impacted the volumes of the company both locally and internationally. The cost of sales also slipped by 24 percent year-on-year due to low capacity utilization and curtailed operations, GP margin dropped to 7.2 percent in 2020 while gross profit registered a downfall of 51 percent. 29 percent lesser selling and distribution expense in 2020 was the result of low freight and forwarding charges as export volumes remained lackluster. Advertising and marketing activities were also cut back during 2020 which also contributed in keeping the distribution expense in check. Admin expense rose by 1 percent during 2020. Other expense provided the much needed breather as it inched down by 69 percent year-on-year in 2020 on account of lower provisioning for WWF and WPPF. Conversely, other income didn’t turn out to be favorable and shrank by 67 percent year-on-year in 2020 due to drastic drop in exchange gain and dividend income from the subsidiary company. All these factors pushed down the operating profit by 73 percent year-on-year in 2020 with a steep decline in OP margin which clocked in at 4.3 percent in 2020. Finance cost grew due to monetary tightening in the initial quarters of FY20. This shoved the bottomline into loss zone. INIL reported a net loss of Rs.694.20 million in 2020 with a loss per share of Rs.5.26.

In 2021, INIL posted a staggering 53 percent year-on-year growth in topline which came on the back of volumetric growth of 25 percent and 71 percent year-on-year in local and export sales. Cost of sales also magnified by 42 percent due to record high prices of steel. Yet high sales volume and improved prices of INIL’s products resulted in a 190 percent year-on-year growth in gross profit. GP margin boasted a strong rebound and climbed up to 13.7 percent in 2021. High operating expense represents inflation as well as rise in ocean freight charges due to higher export sales. High provisioning for WWF and WPPF as well as generous amount of donations also drove up the other expense by 514 percent in 2021. Exchange gain slightly reduced due to appreciation in the value of Pak Rupee in 2021, however, high dividend and rental income from subsidiary company saved the day for other income which flew up by 82 percent year-on-year in 2021. The company also reversed the loss allowance on trade debts booked in the previous years. Operating profit multiplied by a stunning 273 percent in 2021 which translated into an OP margin of 10.4 percent. Finance cost also plunged as discount rate was reduced during the year. The bottomline posted a net profit of Rs.2314.56 million in 2021 with an NP margin of 8 percent – the highest among all the years under consideration. EPS reached Rs.17.55 in 2021.

In 2022, the topline posted a robust growth of 31 percent. Locally, the off-take slid by 10 percent year-on-year due to uncertain economic and political environment while export volume grew by 9 percent year-on-year during 2022 on the back of improved access to the European region. Historic high prices of steel coupled with depreciated Pak Rupee resulted in a 33 percent year-on-year rise in the cost of sales. Gross profit grew by 17 percent in 2022 but GP margin slipped to 12.3 percent. The company undertook rigorous cost control measures and pushed down its administrative expense by 10 percent in 2022, however, selling and distribution expense grew by 73 percent year-on-year due to higher exports sales volumes which pushed up the freight charges. Other income posted handsome growth of 209 percent in 2022 on account of dividend income from subsidiary company and robust exchange gain due to Pak Rupee depreciation while other expense moved down by 34 percent. Operating profit expanded by 61 percent in 2022 and OP margin also ticked up to 12.8 percent. However, the joy proved to be short-lived as rise in finance cost due to high discount rate and added borrowings and high tax rate due to the imposition of super tax shoved the bottomline down by 7 percent year-on-year in 2022 and NP margin also plunged to 5.7 percent. EPS for 2022 was recorded at Rs.16.35.

Recent Performance (9MFY23)

After two consecutive years of topline growth, FY23 appears to be a bumpy year yet again. The topline was 28 percent lower in 9MFY23 versus the same period last year due to tamed demand from the local market. Overall production also shrank by 45 percent due to demand compression. Curtailed operation also reduced the cost of sales by 29 percent year-on-year which resulted in a rise in GP margin from 10.7 percent in 9MFY22 to 12.2 percent during 9MFY23. Operating expenses shrank considerably because of lower freight charges on account of lesser exports. Other expense also plummeted due to lesser WWF and WPPF. Other income slid on the basis of lesser dividend income from associated company and lesser exchange gain. Operating profit declined by 19 percent year-on-year in 9MFY23, yet OP margin improved from 13.7 percent in 9MFY22 to 15.5 percent during 9MFY23. While margins were improving until now, severely high finance cost on the back of high discount rate and high borrowing pushed the bottomline down by 41 percent year-on-year in 9MFY23 with an NP margin of 7 percent versus 8.5 percent during 9MFY22. EPS also plunged to Rs.10.77 in 9MFY23 from Rs.18.16 during the same period last year.

Future Outlook

Local sales which form the largest chunk of INIL’s total sales will continue to tumble on the back of political and economic headwinds coupled with high inflation which has severely compressed the purchasing power of consumers. While export demand stays strong, the company has to forgo orders due to shortage of raw materials and restrictions on import on account of dwindling foreign exchange reserves. Moreover, Pak Rupee depreciation had made the raw materials quite expensive for the company which is leading to increased borrowings and jacked-up finance cost. All these factors lay the margins of INIL on the line.