IMS Steel Universe is expected to post cumulative NPAT of c.PKR1.6bn in 1QFY23, down 55% QoQ (-82% YoY), amid lower margins, inventory & exchange losses, and elevated finance cost.
We expect gross margins of the IMS Steel Universe to remain flat QoQ, but down 3.8ppt YoY due to (i) lower offtake due to floods and elevated construction costs, (ii) elevated power and fuel cost, and (iii) inventory losses from flat steel due to decline in HRC-CRC spreads in case of ISL.
IMS Steel Universe has underperformed KSE-100 Index by 24.1% CYTD, mainly due to weak demand outlook, lower pricing power and reduction in spreads. We have a preference for MUGHAL as its diversification into the non-ferrous segment showcases a robust outlook.
Long steel: Earnings to remain firm despite sluggish demand
IMS Long Steel Universe is expected to post combined net profits of c.PKR580mn in 1QFY23, up 8% QoQ. However, ASTL and MUGHAL’s topline is expected to decrease by 22% QoQ, due to a decline in volumetric sales. Despite the decline in international scrap prices, margins are expected to remain flat QoQ, as both long steel companies hold high cost inventory. The slowdown in volumes follows the prolonged monsoon season, leading to flooding, and ballooning construction costs. With regards to the non-ferrous segment in case of MUGHAL, copper prices continued the downward trend, contracting to c.USD8,000/ton in 1Q from c.USD9,500/ton in 4Q. That said, we still believe that the non-ferrous segment will continue to support MUGHAL’s overall topline. The Copper segment contributed c.25% of overall revenues and nearly half of the net profit in FY22.
Flat Steel: Lower spreads will trigger higher inventory losses
International Steels Ltd is likely to witness a c.10% QoQ decline in offtake, amid a visible slowdown in white good production and 2/3 wheelers. The decrease in local appliance and 2/3 wheelers is largely attributed to inflationary pressure, PKR slippage and to some extent import curtailment measures taken by the government. However, we expect gross margins to remain relatively flat QoQ, due to the proactive price increases. CRC-HRC spreads have been volatile throughout the year, averaging at US$74/ton in 1Q. On the flip side, the large inventory held by ISL (c.PKR30bn) at the end of 4Q (at higher costs), pose a key risk to our margin estimate, due to potentially higher-than-estimated inventory losses.
Demand to rebound despite some headwinds
Despite multiple price hikes during the quarter, IMS Steel Universe underperformed KSE-100 Index by 24% CYTD. This is due to the bleak outlook on volumetric sales amid ongoing macroeconomic weakening and lower future pricing power, in our view. However, we expect that construction activity will kick in post flood destruction in coming quarters and demand of long steel will likely revive, in our view. Although the companies are likely to face working capital constraints over the 100% cash margin required on new L/C, better inventory management and sustainable non-ferrous segment margins (in case of MUGHAL), are likely to keep earnings at decent levels in the coming quarters. Key triggers for ISL are the formulation of a 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 non-ferrous segment.