Earnings Report /

Pakistan Steel: 2Q21 Previews – expect robust earnings in light of strong demand

  • We expect our Steel Universe to post cumulative 2QFY21 NPAT of PKR1,873mn, up 83% yoy, on the back of surge in demand

  • ASTL and MUGHAL are expected to post a jump in revenues and GMs, due to higher sales and inventory at lower cost

  • ISL’s earnings and GMs are expected to rise by (100%/3.7ppt qoq) due to price hikes and improved CRC-HRC spreads

Intermarket Securities
19 January 2021

We expect our Steel Universe to post cumulative 2QFY21 NPAT of PKR1,873mn, up 83% yoy. Overall profitability is expected to rise due to an increase in sales led by a broad-based surge in demand from the construction space, 2/3 wheelers and other segments.

ASTL and MUGHAL are expected to post a jump in revenues amid higher volumes and the significant rise in rebar prices (cost pass-on) up 20% since Sep’20, due to higher RM cost (scrap/HRC prices rose 19%/11% qoq). We expect gross margins to also improve due to higher utilization and large inventory, at lower cost, from the previous quarter.

ISL’s top-line is expected to rise by 25% yoy in the backdrop of higher 2/3 wheelers’ sales (up 12% qoq and 16% yoy) and strong demand from other segments. Margins are expected to improve due to several price hikes and improved international CRC-HRC spreads during 2Q.

ASTL: Rise in volumes to lead to improved earnings

We expect Amreli Steels (ASTL) to post a NPAT of PKR200mn (EPS: PKR0.67) for 2QFY21, which will come off a loss last year (LPS: PKR0.78) while better than the previous quarter’s result (1QFY21 EPS: PKR0.37). The company is expected to improve profitability for the 2nd consecutive quarter with healthy gross margins (11.2% expected during 2Q vs. 7.9% in SPLY). This is backed by (i) strong demand post easing of lockdowns, (ii) no more electricity one-offs, and (iii) ability to pass on any cost pressures through price increments. Besides our expectation of higher volumes (courtesy rising construction activity following government incentives), the improvement in earnings also stems from lower finance cost (drop in interest rates to 7%), expected 40% lower yoy. We maintain our Neutral stance on ASTL with a June 2021 TP of PKR49.0/sh.

MUGHAL: Robust local demand and exports to lift margins

Mughal Steel (MUGHAL) is expected to post a NPAT of PKR551mn (EPS: PKR2.19) for 2QFY21, compared to a NPAT of PKR102mn (EPS: PKR0.41) in SPLY. The expected earnings growth emanates from higher sales, which is inspired from increased cement dispatches during 2Q (up 17% qoq and 12% yoy). Net sales will grow by 34% yoy and 40% qoq due to (i) rise in rebar/girder volumes, (ii) greater exports of copper, and (iii) increase in finished good prices. Gross margins are also expected to improve by 1.6ppt qoq to 12.8%. We expect MUGHAL to have exported greater copper ingots during 2Q as international copper prices surged c.30% to over US$8,000/ton. By our estimate, volumetric sales of 1,500 tons/quarter can have an annualized EPS impact of PKR2.8. We remain Neutral on MUGHAL with a TP of PKR73/sh.

ISL: Healthy spreads amid rise in CRC/HDGC prices

Healthy demand from 2/3 wheelers (up 12% qoq and 16% yoy) and other flat steel reliant industries point towards robust sales, where we expect ISL to post 2QFY21 NPAT of PKR1,122mn (EPS: PKR2.58) compared to a NPAT of PKR118mn (EPS: PKR0.27) during SPLY. We expect the top-line to rise by 25% yoy, due to several price hikes during the period. CRC-HRC spreads also improved during the quarter, averaging US$136/ton, up 69% qoq. We expect gross margins to clock in at 12.6% (vs 8.9% during 1Q). We are Neutral on ISL with a TP of PKR89/sh. Underlying triggers for the stock will be the resumption of sales to the pipe-making industry (currently disallowed under SRO641) and healthy international spreads for a prolonged period.