Ittefaq Iron Industries Limited

Ittefaq Iron Industries Limited (PSX: ITTEFAQ) was incorporated in Pakistan as a private limited company in 2004 and was previously known as Ittefaq Sons Private Limited. The company was converted into a public limited company in 2017 and changed its name to the current one in the same year. The company is engaged in the manufacturing of Iron bars and Girders.

Pattern of Shareholding

As of June 30, 2023, ITTEFAQ has a total of 144.34 million shares outstanding which are held by 4988 shareholders. The local general public has the majority stake of 86.62 percent in ITTEFAQ followed by Directors, the CEO, their spouse, and minor children holding 8.16 percent shares. Around 2.93 percent of the company’s shares are held by joint stock companies while 2.26 percent of shares are held by Banks, DFIs, and NBFIs. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

Since 2018, ITTEFAQ’s topline has been making great strides except for a decline in 2020 and 2023 where the company also posted a net loss. ITTEFAQ’s bottomline and margins which were tumbling until 2020, significantly rebounded in 2021 only to slump back in the subsequent years. The detailed performance review of the period under consideration is given below.

In 2019, ITTEFAQ’s topline posted a 9.87 percent year-on-year rise. The company had an installed capacity of 120,000 MT for the rolling mill and 160,000 for the structural mill. During 2019, ITTEFAQ achieved 62 percent of its rolling mill capacity and 23 percent of its structural mill capacity versus 67 percent and 0 percent capacity utilization achieved in the previous year. low capacity utilization of the rolling mill was in line with the market demand during the year which was greatly suppressed on account of political instability, steep hike in the policy rate, Pak Rupee depreciation, and rising inflationary trend. This had put industrial and infrastructure development activity in the country at a standstill, resulting in a tamed demand for steel. Due to the similar reasons quoted above, the cost of ITTEFAQ’s sales grew by 10.61 percent year-on-year. This, although, resulted in 3.19 percent year-on-year growth in gross profit, GP margin fell from 10 percent in 2018 to 9.39 percent in 2019. Distribution expense massively grew to the tune of 54 percent in 2019 which was the result of extensive advertising undertaken during the year. Higher rebates and commissions as well as payroll expenses also contributed to an overall growth in distribution expenses in 2019. 51 percent spike in administrative expense came on account of increased human resource headcount during 2019 as new furnace and re-modification rolling was plant installed during the year. Lower provisioning for WWF and WPPF culminated in a 20.84 percent year-on-year plunge in other expenses in 2019. Other income also slipped by 24.92 percent year-on-year in 2019 on account of lower returns on deposit accounts. Operating profit declined by 2.51 percent year-on-year in 2019 with OP margin nose-diving to 7.43 percent from 8.37 percent in 2018. Finance costs grew by 76.64 percent year-on-year in 2019 on account of the high discount rate coupled with increased borrowings. However, an increase in the company’s equity due to 13.12 million bonus shares issued at the end of the year resulted in a dip in the debt-to-equity ratio from 51 percent in 2018 to 38 percent in 2019. ITTEFAQ’s bottom line posted a 36.68 percent year-on-year slash in 2019 to clock in at Rs.198.19 million with an NP margin of 2.91 percent versus 5.1 percent in 2018. EPS also dropped from Rs.2.17 in 2018 to Rs.1.37 in 2019.

In 2020, ITTEFAQ’s net sales crashed by 50.29 percent year-on-year as local as well as global economies were jolted by COVID-19. A massive cut in government spending on PSDP coupled with lackluster LSM activity contributed to subdued steel turnover in 2020. Widespread lockdowns imposed during the year coupled with tamed demand translated into a fall in ITTEFAQ’s capacity utilization of the rolling mill as well as the structure and melting mill to 28 percent and 18 percent respectively. Cost of sales dropped by 45.42 percent, translating into 97.25 percent lower gross profit recorded by the company in 2020. GP margin drastically fell to 0.52 percent in 2020. Excessive advertisement didn’t let the distribution expense show any respite in 2020 which grew by 62.21 percent year-on-year in 2020. Conversely, administrative expenses slumped by 11 percent year-on-year in 2020 due to lesser payroll expenses incurred during the year. Zero provisioning for WWF and WPPF resulted in a 1.44 percent dip in other expenses in 2020. Other expenses would have been much lower had the company not booked a provision worth Rs.23.98 million against doubtful debts owing to deteriorating business fundamentals amid COVID-19. Other income slid by 29 percent year-on-year in 2020 due to the high-base effect owing to the gain earned on the disposal of property, plant, and equipment in 2019. The company posted an operating loss of Rs.128.03 million in 2020. Finance costs dwindled by 79.82 percent year-on-year in 2020 due to lower long-term borrowings and also because the discount rate started sliding down in the last quarter of FY20. ITTEFAQ posted a net loss of Rs.212.81 million in 2020 with a loss per share of Rs.1.47.

ITTEFAQ closed 2021 with a staggering 83.18 percent year-on-year growth in its topline. The company’s rolling mill plant operated at 46 percent capacity in 2021 to produce 64,708 MT while the melting and structure mill operated at 58.8 percent capacity to produce 65,102 MT. The demand recovery was the result of a comprehensive project for the construction industry announced by the government coupled with higher PSDP spending. Furthermore, the initiation of the Diamer Bhasha dam during the year also buttressed the demand for steel products. Despite a 64.95 percent year-on-year cost hike on account of an increase in the prices of scrap in the international market, higher demand, as well as upward revision in steel prices, resulted in a 3579.44 percent bigger gross profit recorded in 2021 with GP margin jumping up at 10.42 percent. Increased sales volume meant higher packing as well as handling and carriage charges. This culminated in a 29.10 percent year-on-year hike in distribution expense in 2021. Administrative expenses inched up by 6.15 percent year-on-year mainly due to higher payroll expenses incurred during the year. While the company booked considerably lower provisions against doubtful debt in 2021 due to an improved economic backdrop, higher provisioning against WWF and WPPF pushed other expenses up by 45.56 percent year-on-year in 2021. Other income also posted a significant 151.14 percent rise in 2021, however still stayed at 0.15 percent of ITTEFAQ’s net sales. Unlike last year, ITTEFAQ was able to post an operating profit of Rs.474.59 million in 2021 with an OP margin of 7.65 percent. Finance costs slid by 4.13 percent year-on-year due to monetary easing. The company recorded a net profit of Rs.266.76 million in 2021 with an NP margin of 4.3 percent and EPS of Rs. 1.85.

ITTEFAQ’s net sales posted 81 percent year-on-year growth in 2022 on the back of improved steel prices coupled with higher sales volume. The company operated its rolling mill plant at 50.5 percent capacity and melting plant at 58 percent resulting in a production volume of 70,735 MT and 75,545 MT respectively in 2022. However, a 92.91 percent higher cost of sales on account of inflated prices of scrap in the international market, a significant reduction in the value of the Pak Rupee, and a steep hike in energy and fuel prices pushed gross profit down by 21.20 percent year-on-year in 2022. GP margin slumped to 4.53 percent in 2022. Higher advertisement and packing material charges resulted in a 28.36 percent spike in distribution charges in 2022. Administrative expenses inched up by 16.41 percent year-on-year in 2022 which was in line with inflation despite reduced manpower. Service costs worth Rs.45.672 million incurred during the year pushed the other expenses up by 82 percent year-on-year in 2022 despite a drop in provisioning against WWF and WPPF during the year. Higher return on bank deposits translated into a 10.89 percent year-on-year rise in other income in 2022. High cost of sales and operating expense drove the operating profit down by 41.95 percent year-on-year in 2022 with OP margin slithering to 2.45 percent. Finance costs grew by 50.36 percent year-on-year due to excessive monetary tightening during the year. This pushed net profit down by 12.26 percent year-on-year to clock in at Rs.234.05 million in 2022 with EPS of Rs.1.62 and NP margin of 2.1 percent.

Lackluster LSM growth, as well as sluggish overall economic activity, kept steel demand under severe pressure during 2023. This resulted in a 26.2 percent year-on-year decline in ITTEFAQ’s net sales during 2023. During the year, ITTEFAQ operated its rolling mill at 24.5 percent capacity while its melting plant attained a capacity utilization of 30.97 percent. Cost of sales also slid by 24 percent year-on-year. This resulted in 72 percent slippage in gross profit in 2023 with GP margin falling down to 1.72 percent. Distribution expenses mounted by 16.82 percent due to higher payroll expenses and an increase in other miscellaneous charges. Administrative expenses also succumbed to inflationary pressure and grew by 20.86 percent year-on-year in 2023. Number of employees also increased from 867 in 2022 to 901 in 2023. Other expenses registered a 56.65 percent year-on-year plunge in 2023 due to reduced service costs and no provisioning done for WWF and WPPF in 2023. Other income built up by 130.23 percent in 2023 on account of higher return on bank deposits and notional income on re-measurement of markup under IFRS-9. ITTEFAQ registered an operating loss of Rs.69.95 million in 2023 as against an operating profit of Rs.275.51 million in the previous year. Finance cost surged by 41.61 percent in 2023 due to the unparalleled level of discount rate. Debt-to-equity ratio slid to 35 percent in 2023. ITTEFAQ recorded a net loss of Rs.94.456 million in 2023 with a loss per share of Rs.0.65.

Recent Performance (9MFY24)

ITTEFAQ’s net sales registered a year-on-year decline of 75.76 percent during 9MFY24. This was on account of sluggish construction and infrastructure activity in the country due to an ill-fated economic and political backdrop. Demand drop was further intensified by high transportation charges due to the implementation of axle load and the Red Sea crisis. Cost of sales also slid, however, with a lower magnitude of 72 percent. This resulted in a gross loss of Rs.254.511 million in 9MFY24 as against a gross profit of Rs.29.414 million recorded in 9MFY23. Curtailed sales volume translated into 4.35 percent lower distribution expense in 9MFY24. Conversely, administrative expenses inched up by 5.21 percent during the period owing to inflationary pressure. Lower profit-related provisioning translated into 2 percent lower other expenses incurred by ITTEFQ in 9MFY24. Conversely, other income strengthened by 146.58 percent during the period, particularly on account of higher profit on bank deposits. ITTEFAQ’s operating loss multiplied by 193.81 percent during 9MFY24 to clock in at Rs.416.452 million. Finance costs surged by 48.84 percent during the period due to the high discount rate. The company posted a net loss of Rs.473.476 million in 9MFY24, up 92.9 percent year-on-year. Loss per share stood at Rs.3.28 in 9MFY24 versus a loss per share of Rs.1.7 during 9MFY23.

Future Outlook

Tamed GDP growth, acute political instability, high cost of doing business due to unprecedented levels of inflation, discount rate, Pak Rupee depreciation, hike in energy fuel prices, and government taxes are expected to take their toll on the steel demand in the short-run. No major projects have been initiated by the government under PSDP and the pace of completion of CPEC projects is also slow, adversely affecting cement and steel sectors.