Earnings Report /
Pakistan

Pakistan Steel: 3Q22 preview – Profitability to decelerate amid slower volumes

  • IMS Steel Universe to post cumulative NPAT of c.PKR3.2bn in 3QFY22

  • IMS Steel Universe underperformed KSE-100 Index by 11.6ppt qoq.

  • We prefer MUGHAL (TP of PKR122/sh), as top pick in the sector, for its diversification into non-ferrous segment.

Ali Aziz Soorty
Intermarket Securities
20 April 2022
  • IMS Steel Universe to post cumulative NPAT of c.PKR3.2bn in 3QFY22, down c.14% qoq, this is due to slower volumes amid elevated construction cost and seasonal slowdown.  

  • We expect that gross margins of long steel companies will hold strong due to (i) sequential increase in rebar prices, and (ii) slight let off in international scrap prices. However, flat steel margins are likely to decline qoq due to contraction in CRC-HRC spreads internationally.

  • Despite the series of price hikes in both long and flat steel products in 3Q, IMS Steel Universe underperformed KSE-100 Index by 11.6ppt qoq. We prefer MUGHAL (TP of PKR121/sh), as top pick in the sector, for its diversification into non-ferrous segment.

Long steel: Lower volumes will dent quarterly earnings

We expect IMS Long Steel Universe to post combined net profits of c.PKR2.1bn for 3QFY22, down c.14% qoq, but up 33% yoy. Sequentially, ASTL and MUGHAL topline expected to decrease c.15%, this is due to reduced volumes during the 3Q. However, margins of long steel are likely to increase amid strong contribution coming from ferrous segment amid efficient inventory management, in our view. With regards to volumes, we estimate rebar offtake to decline by 8% qoq. We believe that the slowdown in volumes is majorly due to a seasonal affect and this will likely to normalize post Ramadan and prolong Eid holidays, as the construction activity will resume and the projects like Mera Ghar Mera Pakistan Housing Scheme, and private sector demand kicks in. With regards to the non-ferrous segment (MUGHAL), the elevated Copper prices in 3Q to c.US$9,900/ton (up c.5% qoq) will support MUGHAL’s overall topline. We highlight that the Copper segment contributed c.25% of overall revenues and nearly half of the net profits in 1HFY22, partly attributed to timely procurement of compressor scrap at low rates. This resulted in significant inventory gains. But in 3Q gross margins are likely to further moderate owing to diminishing inventory gains. Going forward, non-ferrous segment margins are likely to normalize at c.15-16%, in our view.

Flat Steel: Depressed spreads will reduce margins

In the flat steel sector, we expect volumes for International Steels Ltd (ISL) to increase by c.5% qoq amid increase in white goods production, which are up c.30% yoy in 8MFY22. The increase in local appliance sales is attributed to anticipated rise in imported raw material and PKR slippage coupled with elevated global freight, which have in turn made the local industry competitive. However, gross margins are likely to decline further in 3Q, albeit slightly, due to the decline in CRC-HRC spreads (by c.US$25/ton to c.US$108/ton in 3Q), while potential inventory losses are likely to suppress margins further, in our view. We believe current spreads are short-lived and will likely rebound to c.US$85-90/ton in the medium term on the back of China’s initiative to ramp up HRC capacities during 2022-23 (c.68mn MT or c.20% of existing total capacities in China). This may prove to be of greater relevance in the medium term as HRC production capacity in China might be expanding too fast, making an oversupply situation inevitable, in our view.

Outook

Despite the multiple price hikes during the quarter, the IMS Steel Universe underperformed KSE-100 Index by 11.6ppt qoq, due to slower volumes going forward and macroeconomic instability. However, we expect moderate growth in construction activity in the coming quarters due to (i) continued application and loan disbursements in the Mera Ghar Mera Pakistan scheme (ii) potential infrastructure spending ahead of the elections and (iii) ongoing work on dams, in our view. Key triggers for the sector include formulation of a maiden Steel Policy, and concrete plans on establishing an HRC plant for ISL.