Equity Analysis /
Pakistan

International Steels Ltd: Q1 FY 20 preview: Lower volumes/margins to hurt profit

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    14 October 2019

    We expect International Steels (ISL) to post Q1 FY 20 NPAT of PKR441mn (EPS: PKR1.01), down 48% yoy, but up 45% qoq. However, on pre-tax basis, earnings will decline by 29% sequentially (PKR610mn) during Q1 FY 20, in our view. Reasons include:

    • Lower volume sales expected in Q1 FY 20 on account of slow economic growth and challenges faced in selling to pipe-making industry (due to SRO-641). One major customer for ISL is 2/3 wheeler industry, where production declined by 19% yoy (PAMA only) during Q1 FY 20.
    • Gross margins of 10.8%, lower on both qoq/yoy basis due to PKR depreciation of 11% in Q4 FY 19 (inventory period of c3 months) and slight pick up in depreciation/power costs from Q1 FY 20. This is despite price increases in Jun’19, which we think may not be sufficient to cover for associated cost pressures. Our gross profit forecast is PKR1,239mn, down 23% yoy.
    • Higher finance cost of PKR329mn, up 15% yoy, primarily due to an increase in interest rates in Jul’19
    • Effective tax rate of 28% for Q1 MY 20, compared with 65% recorded in the previous quarter (reversal of tax credit).

    We have a Neutral stance on ISL with Jun’20 TP of PKR50/sh.