International Steels Limited (ISL)
International Steels Limited (PSX: ISL) is a leading flat steel manufacturer in Pakistan commencing production in 2010. It is a subsidiary of International Industries Limited (IIL). The company was established with a $165 million investment, with equity contributions from Sumitomo Corporation, JFE-Japan and the International Finance Corporation. According to its annual report, the company has invested $250 million in flat steel capacity.
Specifically, the company manufactures different specifications and varieties of Cold Rolled Coils (CRC), Galvanized Iron Coils (GI) and Color Coated Steel supplying it countrywide and also exporting abroad. With its most recent expansions, the company has a capacity of 1 million tons of CRC, with a hot dip galvanized capacity of 450,000 tons and 84,000 tons’ capacity of color coating capacity on cold rolled, galvanized, galvalume, aluminum and stainless steel sheets.
The company’s steel is used for a range of applications in engineering, industrial, construction and manufacturing industries domestically. The company also exports about 8-12 percent of its total sales to various international markets. The company went public in 2011.
Shareholdings
Being a subsidiary of IIL, more than 56 percent of the company’s shares were held by the holding company as at June 2018. A foreign investor company, Sumitomo Corporation held more 9 percent of the company’s shares. Meanwhile, JFE Steel Corporation holds 4.7 percent while nearly 11 percent of the company’s shares are held by the general public, both local and foreign. Both investors have been with ISL since the start.
Industry dynamics and ISL’s operational and financial performance
Steel, particularly flat products is a smaller market in Pakistan compared to long products, which are generally more used in the construction industry. Flat products are also used in the automotive, white goods and other industries. The market share for flat products is around 39 percent against long products with 61 percent share. Whereas the total market size is 9 million tons, it is estimated that about one third of the total demand is catered to by imports. In flat steel, imports coming through China, Ukraine and Russia are substantially cheaper. Meanwhile, sectors such as automotives require certain specialized steel products that local manufacturers are unable to cater to. With 30 percent of the market being catered to by imports, local players are racing to substitute imports entirely and meet the growing demand. ISL along with Aisha steel has expanded capacity—ISL raising CRC capacity from 550,000 to a million tons while Aisha having raised to 700,000 tons from an earlier 220,000 tons. Together the CRC capacity has reached 1.7 million tons. Aisha is also adding a galvanized line.
It is clear that local players have been investing in the creating a strong steel presence with ISL for now taking the lead in flat products which is where demand will be when Pakistan has beyond the construction and infrastructure phase, onto growing it’s still infant manufacturing industries.
The company is well-placed to capture that added demand, even if it faces competition from cheaper imports. It has protections in the form of custom duties and RDs and a remedial measure in the form of an anti-dumping duty. In FY18, it demonstrated a growth in volumes of 10 percent and in revenues of 41 percent. Before expansion that came online in June-18, the company was running at a capacity of 84 percent for CRC and 68 percent for GI in FY17. The galvanized share has since grown to 71 percent.
The company has come a long way—from producing less than 200,000 tons till FY12, it has grown volumes to 500,000 and above. Another metric of growth and demand in the domestic market is the exports share. Though production volumes grew in 2018 and exports grew as well, they took a back seat in terms of sales mix, their share dropping to 8 percent from 10 percent in FY17 and 12 percent during FY15. The domestic market is providing ISL with more of the demand than ever before.
Revenues have also followed a similar growth trajectory. Net sales have quadrupled since FY12 with positive and double digit growth almost each year. The company imports hot rolled coils (HRC) and other raw material that does impact its margins since global commodity prices and market dynamics determine the cost per ton of steel used to make CRC and GI.
Gross margins have improved from 9 percent in FY12 to 14 percent in FY16 and 18 percent in FY17. Though these dropped to 16 percent again during FY18. The company associates the drop in margins to under invoiced and secondary grade materials being imported into the country. However, production grew, while the revenue per ton of production also grew—substantially by 39 percent. Cost per ton of production grew by 42 percent which is where the rub has come in.
However, the company’s revenues are testament to improved efficiencies along with expansions and greater capacity utilization. During FY16, it installed an electrolysis plant, and during FY17, it added a galvanized line and added color coating capacity. The pickling and annealing capacity was also enhanced while the company is now investing in a service center. The company has its own electricity power generation facility with a capacity of 19.2 MW of gas fired co-generation power plant. This helps cut down on power costs and helps generate additional funds from selling to K-electric. Meanwhile, ISL also treats its waste which is reused for production.
Outlook
While global HRC prices pose a prominent risk—as well as the rupee depreciation since it impacts the cost of import—ISL has a strong market share and can compete in markets where quality steel is needed. CPEC is a huge demand driver for upcoming demand, not just in construction industry but in the automotive and other manufacturing industries. Meanwhile, as industries grow and expand, the demand for flat products will grow as well. That is a long term view. In the short run, growth may not be as vibrant.
Having said that, though the economy has been slowing down, and the construction and infrastructure industry is also witnessing reduced investments, ISL’s revenues have still grown in 1HFY19. Where the company has suffered is the margins. With the depreciated rupee and higher HRC prices, gross margins fell by 27 percent in the first half, year on year.
Even so, the second half may not be as positive, revenue wise. The automotive industry as well as other sectors are feeling the pinch which are traditional flat steel markets—ISL will suffer. The fiscal year performance will largely depend on how well the economy recovers from its current slump through the second half. If rupee is depreciated further, margins will face a tougher year end.
