ISL held its Analyst Briefing Session today to discuss the recent financial performance, also painting a lackluster outlook for FY23 amid monsoon flooding. To recall, ISL posted a dull EPS of PKR0.13 in 4QFY22 (FY22 EPS of PKR12.44), despite healthy gross margin, which were overshadowed by the sharp decline in volumetric sales and inflated operating cost. Going forward, FY23 is positioned to be a challenging year, owing to expectations of depressed demand.
Guidance for future sales and profitability
In light of the administrative measures taken by GOP, the company is forced to open new L/C’s for raw materials on a 100% cash margin basis. Though this has put immense pressure on the company in the form of working capital requirements, it has been beneficial for inventory management. With declining international flat steel prices the company is able to procure raw material on a day to day basis, shielding them from inventory losses.
With regards to the dumping of imported CRC in the local market, the management stated that antidumping duties on CRC and HDGC were further extended for a period of five years by the national Tariff Commission of Pakistan.
This year, ISL has invested PKR1.23bn in a debottlenecking process by successfully installing Electrolytic Cleaning Line at its manufacturing facility. This new addition will improve the surface quality of the company’s products, specifically for the automotive and appliance sectors. The rewinding line with an electrolytic cleaning section designed specifically to debottleneck CRC and increase efficiency in TMBP (Tin Mill Black Plate) production.
On various occasions the company has hinted towards an import substitute - HRC project in the works. It has been a long standing objective of the company to localize hot rolled coil manufacturing by setting up hot strip mill in Pakistan (1.2mn MT capacity, built with electric arc furnace). The management was not able to share comprehensive details regarding the project as it is still in early phases, and so we await further clarity on the project.
According to management’s guidance and our estimates, ISL is expected to see a -4% contraction in volumetric output. The coming months are likely to add to the woes of the sector, owing to PKR volatility, potential decline in rural sales (floods) and accompanied by a gas shortage in the winter months. With clarity yet to be received on the easing of administrative measures (100% cash margin), production is likely to remain hampered in 1QFY23 as well. Elevated interest rates and inflation will further slowdown sales in FY23. Having said that, management is keen on the fact that pent up demand during 1HFY23 can be offset by the rebuilding phase. We currently have a Buy stance on ISL with a target price of PKR91/sh, but look to revise our estimates.