Earnings Report /
Pakistan

Pakistan Steel: 4Q preview – Profits to decelerate amid supertax, lower volumes

  • IMS Steel Universe underperformed KSE-100 Index by 16.5ppt, mainly due to lower volumes & primary margins going forward.

  • IMS Steel Universe is expected to post cumulative NPAT of c.PKR1.6bn in 4QFY22, down 34% QoQ

  • We have a strong preference for MUGHAL for its diversification into non-ferrous segment.

Intermarket Securities
17 August 2022

IMS Steel Universe is expected to post cumulative NPAT of c.PKR1.6bn in 4QFY22, down 34% QoQ, as slower volumes amid elevated construction cost and one-off tax implications will drag profits.

We expect gross margins of long steel companies will hold up due to i) sequential increase in rebar prices, and ii) mild softening in international scrap prices. Similarly, flat steel margins are likely to improve sequentially, due to relaying of costs and high inventory levels.

Despite the series of price hikes in 4Q, IMS Steel Universe underperformed KSE-100 Index by 16.5ppt, mainly due to lower volumes and primary margins going forward. We have a strong preference for MUGHAL 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.PKR1.1bn for 4QFY22, down 18% QoQ. Sequentially, ASTL’s and MUGHAL’s topline are expected to increase by 13%, owing to elevated selling prices. 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 5% QoQ, whereas that of MUGHAL to increase by 23% QoQ. We believe that the slowdown in volumes is majorly due to prolonged Eid/Muharram holidays, monsoon season, and  inflated construction cost. With regards to the non-ferrous segment (MUGHAL), copper prices slightly contracted in 4Q to USD9,900/ton. But, we expect it to continue supporting MUGHAL’s overall topline. We highlight that the Copper segment contributed c.25% of overall revenues and nearly half of the net profit in 9MFY22, partly attributed to timely procurement of compressor scrap at low rates, coupled with currency devaluation. This resulted in significant inventory gains. But in 4Q gross margins are likely to moderate owing to diminishing inventory gains. Going forward, non-ferrous segment margins are likely to normalize at c.18-20%, in our view.

Flat Steel: Depressed spreads will reduce margins

In the flat steel sector, we expect volumes for International Steels Ltd (ISL) to decrease by c.20% QoQ amid slowdown in white goods, and motorbike  production. The decrease in local appliance sales is attributed to anticipated rise in imported raw material and PKR slippage, coupled with elevated global freight, have in turn made the local industry witness a slowdown. However, gross margins are likely to increase, albeit slightly, compared to 3QFY22, due to the proactive price increases. CRC-HRC spreads have been volatile throughout the year, while margins have averaged c.$74/ton in 4Q. We believe it is vital to keep in mind that the company holds c.PKR20bn in inventories. This leads us to believe that the company is holding on to cheaper raw material which in turn will support their margins further.   

Sustainable earnings despite headwinds

Despite multiple price hikes during the quarter, IMS Steel Universe underperformed KSE-100 Index by 16.5ppt QoQ, due to slower volumes going forward and macroeconomic instability. We expect growth decline in construction activity in the coming quarters due to i) elevated construction cost, ii) rise in interest rates and iii) negligible focus of government on development spending amid fiscal constraints. However, higher inventory levels and better pricing power coupled with sustainable margins from non-ferrous segment in case of MUGHAL will sustain profitability of long steel sector in coming quarters. Key triggers for flat steel are formulation of a maiden Steel Policy, and concrete plans on establishing an HRC plant. We continue to prefer MUGHAL in the steel space owing to continued diversification in the lucrative non-ferrous segment.