International Industries Limited (PSX: INIL) was set up in 1948. It manufactures and markets galvanized steel pipes, precision steel tubes, API line pipes, polymer pipes and fittings. It has two manufacturing facilities in Karachi and one in Lahore.
Shareholding pattern
As at June 30, 2020, the largest shareholders of International Industries Limited are the directors, CEO, their spouses and minor children, that collectively hold over 49 percent of the shares. Of this nearly 33 percent shares are with directors and CEO alone. About 25 percent shares are with the general public; over 8 percent in government financial institutions, followed by 5.5 percent in banks, DFIs, NBFIs. The remaining about 13 percent shares is with the rest of the shareholder categories.
Historical operational performance
International Industries Limited has seen a fluctuating topline as well as profit margins over the past decade.
GDP growth for the Pakistani economy stood at 5.3 percent during FY17, compared to 4.7 percent in FY16, while the iron and steel sector saw a growth of 16.6 percent, compared to a negative growth of 7.5 percent in the preceding year. The company’s gross sales volumes during FY17 stood at 207,768 MT; the domestic sales were driven by strong demand for GI pipes and CR tubing; sales were driven by automotive sector and API range of products. In value terms, net sales were higher by almost 13 percent. Cost of production was slightly lower that kept gross margin relatively flat year on year. However, it was the other income that largely supported operating profit and the bottomline. The unusually higher other income was derived from power generation and dividend from subsidiary company. thus, net margin doubled year on year to 11 percent.
Pakistan’s GDP growth rate was even higher at 5.8 percent in FY18, whereas iron and steel manufacturing saw the second highest growth of nearly 31 percent. For International Industries Limited, gross sales volumes were 270,000 MT; domestic sales volumes were significantly higher than that in last year. This was due to higher infrastructure and project related spending. Growth in two-wheelers, three-wheelers and general fabrication requirements created demand for commercial grade CR tubing. Net sales for the company in value terms grew by over 55 percent; cost of production was higher, consuming over 87 percent of revenue that brought down gross margin to almost 13 percent. Net margin was further affected, recorded at 6 percent, as the share of other income in revenue nearly halved year on year.
GDP growth was subdued in FY19 at 3.3 percent, in comparison to near 6 percent witnessed in FY18, with Large Scale Manufacturing (LSM) contracting by 2.9 percent. For International Industries Limited, net sales revenue increased only marginally at less than 1 percent, while gross sales volumes were lower by 19 percent. The major sectors that affected the iron and steel industry were real estate, construction and automotive- in particular, the demand for commercial grade CR tubing and black pipes. Cost of production, on the other hand, continued to make a large share in revenue at 89 percent, due to rising input prices along with the inflationary trend in the economy. While most other factors remained more or less similar as their shares in revenue, it was other income from dividends that elevated operating profit to almost 12 percent (FY18: 10 percent) and also helped to keep net margin flat year on year at 6 percent.
Large Scale Manufacturing (LSM) contracted by more than 10 percent during FY20 while industries like iron and steel that make a substantial part of the LSM sector also saw a contraction. Demand from end users were adversely affected by the high cost of capital, reduction in PSDP and CNIC requirement on purchases of Rs 50,000 and above. For International Industries, gross sales volumes contracted significantly to 143,000 MT; domestic sales were lower by 25 percent due to the general economic slowdown that was further exacerbated by the outbreak of Covid-19; export sales also declined by 34 percent as a result of slowing global trade and unstable international steel prices. Cost of production was seen at its all-time high of nearly 93 percent of revenue, bringing gross margins to single digits. With other income more than halving and finance cost almost doubling along with minimum tax on turnover, the company posted a loss of Rs 694 million.
Quarterly results and future outlook
Revenue was higher by more than 26 percent during 1HFY21 year on year, whereas profit margins were better due to lower cost of production both for the 2QFY21 and 1HFY21 as compared to that seen in the same period last year that saw costs consuming more than 90 percent of revenue. Lower finance expense owing to lower interest rates also supported profitability. Thus, net margin for 1HFY21 was 8.4 percent compared to a negative 1 percent in 1HFY20.
With the resumption of activities, the economy has begun to regain momentum; the government also announced relief measures in order to sustain economic activities, such as lowering interest rates and announcing construction package to support the industry, which will bode well for the company.