International Steels Ltd (ISL) has posted a NPAT of PKR2.7bn (EPS: PKR6.13) in 1QFY22, up 15% qoq and c.5x yoy. The 1Q result came in significantly higher than our projected EPS of PKR4.30, with major variances stemming from higher revenues and lower Opex.
Key takeaways from 1QFY22 results:
Net revenue has clocked in at PKR24.5bn, up 30% qoq, greater than our expectation of PKR22.2bn, amid higher CRC/HDGC prices (up c.10% qoq to PKR200,5000/ton by end-1Q) and higher volumes due to robust demand from the Autos and white goods industries, in our view.
ISL has posted gross margins of c.18% in 1Q, down c.6ppt qoq, broadly in line with our expectation. The sequential decline in margins emerged from the company acquiring HRC at relatively higher prices in the previous quarter, coupled with the c.7% PKR/USD depreciation, in our view. In 1Q, CRC-HRC spread averaged c.U$110/ton (up 20% qoq).
Distribution and Administration expenses have come in at PKR180mn (down c.60% qoq) and PKR85mn (flat qoq), respectively. Lower distribution expenses can be explained by a change in sales policy possibly to FOB, in our view. We await availability of quarterly accounts for further clarity on these items.
Finance cost has declined c.20% qoq, largely attributed to a decrease in borrowings and exchange losses, in our view. The effective tax rate is 26% in 1Q, against 22% in 4QFY21.
ISL has posted an impressive result, on the back of strong sales qoq amid surge in autos production, while healthy 2CRC-HRC spreads (c.US$110/ton) and inventory gains, further supported overall profitability, in our view. Even though we expect gross margins to decrease in the absence of inventory gains and normalized CRC-HRC spreads in subsequent quarters. The planned backward integration into an HRC plant is a key trigger for both stock price and profitability, in our view. We thus have a Buy rating on the stock with a June 2022 TP of PKR130/sh.