International Steels Ltd: 3QFY21 review – Exceptional gross margins led to earnings beat
- 3Q results came in above our projected EPS of PKR4.71, with the major variance from higher-than-expected gross margins
- Partial Inventory held at lower prices helped boost margins
- Sales volume declined qoq, due to increase in prices
International Steels Ltd (ISL) has posted a NPAT of PKR2.37bn (EPS: PKR5.47) in 3QFY21, compared with a NPAT of PKR0.19bn (EPS: PKR0.44) SPLY, up 7% qoq and a staggering 13x yoy. This has taken the aggregate 9MFY21 NPAT to PKR5.15bn (EPS: PKR11.84), compared with a 9MFY20 NPAT of PKR0.65bn (EPS: PKR1.51). The 3Q result has come in above our projected EPS of PKR4.71, with the major variance stemming from higher-than-expected gross margins (probably due to lower realised prices of HRC and inventory gains).
Net revenue has clocked in at PKR17.4bn, up 33% yoy (flat qoq), due to the surge in global and hence local CRC/HDGC prices (up 39%/44% yoy). However, we suspect sales volume declined qoq, as the net revenue is flat qoq despite local CRC/HDGC prices increasing 18%/17% qoq. Thus, the revenue has come in below our expectation of PKR21bn.
ISL has posted gross margins of c.24% in 3Q, well above our expectation of 17%. The deviation may have stemmed from the company acquiring HRC at much lower prices in the previous quarter (as HRC prices rose 16% qoq in 3Q). ISL was able to increase its gross margins by a staggering c.15ppt yoy and c.4ppt qoq, on the back of inventory gains and unusually high CRC-HRC spreads of US$125/ton.
Distribution and Administration expenses have come in at PKR257mn (up 64% qoq) and PKR131mn (47% qoq), respectively. Higher distribution expenses could be explained by greater exports in 3Q. We await the availability of quarterly accounts for further clarity on these items.
Finance cost was broadly in line with expectations at PKR158mn, down 60% yoy, largely because of lower interest rates. The effective tax rate was 29%.
ISL has posted an impressive result, on the back of strong gross margins with high CRC-HRC spreads (c.US$125/ton) and inventory gains. Even though we expect gross margins to decrease in the absence of inventory gains and normalised CRC-HRC spreads in subsequent quarters, we have a favorable view on the stock for its long-term demand outlook (rising construction activity and import substitution). We thus have a Buy rating on the stock with a June 2022 TP of PKR109.0/sh.
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