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JS Securities Limited – JS Research (06-10-2021)

Karachi, October 06, 2021 (PPI-OT): ISL: Corporate briefing session key takeaways

International Steels Limited (ISL) held its corporate briefing session yesterday to discuss FY21 results and the outlook of the company. We present key takeaways from the session.

International Steels Limited (ISL) announced its FY21 result on 25th August, 2021 wherein the company posted earnings of Rs7.5bn translating into an EPS of Rs17.16. Primary reasons for the increase in company’s profitability were lower finance costs and highest ever sales of Rs~70bn because of better demand due to ease in lockdowns and attractive pricing of its products compared to imported sheets. Company also announced a final dividend of Rs7/share with the result, in addition to interim DPS of Rs3/share.

ISL has recently announced a debottlenecking plan with an estimated project cost of Rs1.23bn, which will result in capacity expansion of Cold Rolled Coils by 120k tons/annum to 350k tons/annum. Completion of the project is expected by Mar- 2023. ISL has also availed SBP’s TERF and LTFF facilities for this enhancement.

Commenting on the possible operations of Pakistan Steel Mills (PSM) in the future, the management shared that it doesn’t manufacture the type of HRC required in the country. Furthermore, PSM has an HRC capacity of only 500k tons whereas the current local HRC demand stands at around 2mn tons.

The company’s key customers include electrical appliances manufacturers, bike manufacturers, pipe manufacturers and the construction sector.

ISL has not been able to sell to one of its major target segments of CRC in the last two years, the pipe industry, because of an SRO which has now been annulled. Resumption of sales to the aforementioned is expected during FY22.

ISL presently procures HRC primarily from Japan and the contract is negotiated at CFR rates. Company carries inventory for 1.5-2 months at any point in time. The company has announced to setup an HRC facility by setting up a Hot Strip Mill in the country with a capacity of 1.2mn tons. The HRC plant will provide with low and medium carbon steel which is used in pipe, building structures, automotive sector and appliances industries. The project will take around 27months to complete and is expected to commence operations by mid of FY25.

A key concern highlighted by the company is the passing on of FATA/PATA exemptions, specific to production in those regions, to the rest of the country by some steel players without paying any sales tax. Another concern is the availability of duty free imports of CRC and Galvanized coils to the auto industry which impacts the local industry.

Rising commodity prices and high freight costs are likely to take a toll on the gross margins of the company. If input prices don’t revert, the company will have to increase prices further to pass on the impact to its end consumer. The company highlighted that persistent devaluation also makes a case for higher prices.