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 its name was changed 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, 2024, ITTEFAQ has a total of 144.34 million shares outstanding, which are held by 4974 shareholders. The local general public has the majority stake of 88.53 percent in ITTEFA,Q followed by Directors, CEO, their spouses, and minor children holding 8.16 percent shares. Around 3.27 percent of the company’s shares are held by joint stock companies. The remaining shares are held by other categories of shareholders.
Historical Performance (2018-22)
ITTEFAQ’s topline plunged thrice during the period under consideration, i.e., in 2020, 2023, and 2024. The company also posted net loss in those three years. ITTEFAQ’s bottom line and margins, which were falling 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 to clock in at Rs.6,809.79 million. 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, a steep hike in the policy rate, Pak Rupee depreciation, and rising inflationary trend. This had put industrial and infrastructure development activity in the country on a standstill, resulting in tamed demand of steel. Due to the similar reasons quoted above, the cost of ITTEFAQ’s sales grew by 10.61 percent year-on-year. Although this 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 expenses massively grew to the tune of 54 percent in 2019, which was the result of extensive advertising undertaken during the year. Higher rebates and commission as well as payroll expenses, also contributed to an overall growth in distribution expenses in 2019. A 51 percent spike in administrative expenses in 2019 came on account of an increased human resource headcount during 2019 as a 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 201,9, with OP margin nose-diving to 7.43 percent from 8.37 percent in 2018. Finance cost grew by 76.64 percent year-on-year in 2019 on account of a 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 an NP margin of 5.1 percent posted 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 to clock in at Rs. 3,385.12 million. This was because the 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 structure and melting mill to 28 percent and 18 percent, respectively. The cost of sales dropped by 45.42 percent in 2020. This translated into a 97.25 percent lower gross profit recorded by the company in 2020. The GP margin drastically fell to 0.52 percent in 2020. Excessive advertisement didn’t let the distribution expenses 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 cost 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, which was recorded at Rs.6,200.92 million. 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,t 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 an upward revision in steel prices resulted in a 3579.44 percent bigger gross profit recorded in 2021, with GP margin jumping up to its highest level of 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 expenses 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 a considerably lower provision against doubtful debt in 2021 due to an improved economic backdrop, higher provisioning for 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, it 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 cost 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 to clock in at Rs.11,225.26 million in 2022. This was 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 production volumes of 70,735 MT and 75,545 MT, respectively, in 2022. However, 92.91 percent higher cost of sales on account of inflated prices of scrap in the international market, significant reduction in the value of Pak Rupee and steep hike in energy and fuel prices pushed gross profit down by 21.20 percent year-on-year in 2022. The 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. The service cost of Rs.45.672 million incurred during the year pushed the other expenses up by 82.22 percent year-on-year in 2022, despite a drop in provisioning done for WWF and WPPF during the year. Higher returns on bank deposits translated into a 10.89 percent year-on-year rise in other income in 2022. The high cost of sales and operating expenses drove the operating profit down by 41.95 percent year-on-year in 2022, with OP margin slithering to 2.45 percent. Finance cost grew by 50.36 percent year-on-year due to excessive monetary tightening during the year. This pushed net profit down by 44.62 percent year-on-year to clock in at Rs.147.72 million in 202,2, with EPS of Rs.1.62 and an NP margin of 1.32 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, which clocked in at Rs. 8,284.45 million in 2023. During the year, ITTEFAQ operated its rolling mill at 24.5 percent capacity, while its melting plant attained capacity utilization of 30.97 percent. The cost of sales also slid by 24 percent year-on-year in 2023. This resulted in a 72 percent slippage in gross profit in 2023, with the GP margin falling to 1.72 percent. Distribution expenses mounted by 16.82 percent due to higher payroll expenses and an increase in other miscellaneous charges incurred during the year. Administrative expenses also succumbed to inflationary pressure and grew by 20.86 percent year-on-year in 2023. A 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 mark-up 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 costs surged by 41.61 percent in 2023 due to the unparalleled level of the discount rate. The 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.
ITTEFAQ’s net sales registered a year-on-year decline of 72.58 percent to clock in at Rs.2,271.68 million in 2024. 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 also because of the Red Sea crisis. During the year, the company operated its rolling plant at 6.58 percent capacity and its melting plant at 7.92 percent capacity. The cost of sales also slid, however, with a lower magnitude of 64.30 percent in 2024 due to heightened energy tariffs. This resulted in a gross loss of Rs.635.22 million in 2024. Curtailed sales volume translated into lower packing material cost and no freight & handling charges incurred during the year. This, coupled with a lower advertisement budget, resulted in 45.72 percent lower distribution expenses incurred in 2024. Conversely, administrative expenses inched up by 10.38 percent in 2024 owing to inflationary pressure, which pushed up the payroll expenses. This was despite the reduction in the workforce from 901 employees in 2023 to 749 employees in 2024. No service cost incurred by the company resulted in 75.95 percent lower other expenses in 2024. Other income also dwindled by 24.69 percent in 2024 as no notional income on re-measurement of mark-up under IFRS 9 was recorded during the year. ITTEFAQ posted a hefty operating loss of Rs.796 million in 2024, up 1037.95 percent. Finance cost surged by 16.63 percent in 2024 due to a higher discount rate and an uptick in borrowings. The company posted a net loss of Rs.821.688 million in 2024, up 769.92 percent year-on-year. Loss per share stood at Rs.5.69 in 2024.
Recent Performance (1HFY25)
ITTEFAQ posted a 0.5 percent year-on-year uptick in its net sales, which stood at Rs. 1,240.08 million in 1HFY25. This might be due to gradual improvement in macroeconomic fundamentals, which provided impetus to the construction industry. The cost of sales slid by 2.97 percent in 1HFY25 due to stability in the Pak Rupee and a slide in international commodity prices due to lower demand. The company’s gross loss declined by 28.55 percent to clock in at Rs.119.607 million in 1HFY25. Distribution and administrative expenses ticked up by 7.95 percent and 5.30 percent, respectively, in 1HFY25. While other expenses remained intact at the last year’s level during 1HFY25, other income posted a staggering 787.44 percent growth. This conveniently offset the company’s other expenses. Operating loss dipped by 20.80 percent to clock in at Rs.217.09 million in 1HFY25. Finance cost ticked up by 3.27 percent in 1HFY25 despite monetary easing. ITTEFAQ posted a net loss of Rs.242.85 million in 1HFY25, down 22.43 percent year-on-year. This translated into a loss per share of Rs.1.68 in 1HFY25 versus a loss per share of Rs.2.17 posted in 1HFY24.
Future Outlook
Gradual improvement in the demand for iron and steel products is expected in FY25 due to a reduction in discount rate and inflation. Lower demand in the international market has put downward pressure on the commodity price, which, coupled with the stability of the Pak Rupee, will reduce the cost of ITTEFAQ. However, the company may also have to register inventory losses and reduce the prices of its products accordingly to incorporate subdued raw material prices. High energy cost still continues to be the Achilles heel for the company.
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