Earnings Report /
Pakistan

International Steels Ltd: Q2 FY 20 review: Significantly lower gross margins lead to earnings miss

    Intermarket Securities
    27 January 2020

    International Steels Ltd (ISL) posted Q2 FY 20 NPAT of PKR118mn (EPS: PKR0.27), down 87% yoy and 66% qoq (pre-tax: down 89%yoy). The result came in below our projected NPAT of PKR338mn (EPS: PKR0.78), led by (i) lower-than-expected sales revenue due to weak international prices on exports translating into (ii) c+300bps yoy/qoq decline in gross profit margins to 7.2%. 

    Key highlights:

    • Revenues increased by 20%qoq, possibly due to higher-than-expected CRC and HDGC exports, where international prices are currently lower than local prevailing prices. Even so, they are below our expectation. That said, sales volume are expected to have improved by 3%qoq.
    • Gross margins of 7.2% also came below our expectation of 11.2%, declining 3.1ppt yoy and 3.5ppt qoq likely due to lower margins on export business, amid stiff competition on the local side and increase in electricity tariffs.
    • Finance cost grew by 2.2x yoy to PKR679mn, led by high working capital requirement and commensurate rise in ST borrowings amid high interest rates.
    • ISL availed potential unutilized tax credits of PKR22mn, similar to Q1 FY 20.

    Our Jun’20 TP of ISL is PKR62/sh which implies a Neutral stance. Despite a tough macro-economic backdrop, decline in international HRC prices and stable PKR against US$ should help in margin accretion, in our view. Over the medium term, prospects for ISL are encouraging due to duty protection and a diverse industrial exposure.

    Risks: i) PKR depreciation against USD, (ii) Rise in international HRC prices, and (iii) low pricing power due to surplus capacity in the sector.