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).

Key takeaways

  • 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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