Its products major consumers are auto industry, oil and gas, water supply and sanitation, power and energy, telecom, builders, steel industry and NGOs. The company continues to remain the market leader in all segments within the country having a market share of about 50% in GI pipe and 40% in CR tubes.
The company strives to manufacture and sell products of the highest international quality and build on its position as the market leader, with sales growing from Rs 15 million in 1976 to more than Rs 12.068 billion in the fiscal year 2007-08. The company has a manufacturing capacity of 300,000 tons of small diameter steel pipes, which are sold in more than 30 countries across the world.
Till today, the company remains the leading exporter of welded steel pipes and tubes from Pakistan. It is certified to various standards of QMS, EMS, OHSAS 18001:1999; and has API Accreditation to Q1-5L and Q1-15LE and the exponential growth of its exports is a strong endorsement of its resolve to maintain the quality of its products comparable to those manufactured internationally.
RECENT RESULTS (HY09)
Slowdown in the economy has affected the International Industries Limited. Demand of its products remained low during HY09 (July-December 2008) as the activity in the construction sector and auto industry remained subdued. The sales volume declined by 15% during HY09. However, the sales revenue for the period increased by 30% from Rs 5.890 billion during HY08 to Rs 7.672 billion during HY09. The sales revenue increased (despite a fall in sales volume) due to an increase in prices of its products. The sales revenue earned from domestic sales and exports increased by 29% and 40% respectively.
The cost of sales of the company increased by around 39% due to high prices of raw material, salaries and electricity, gas, water charges. But major cause of higher cost of sales was the substantial inventory losses that the company faced as steel prices slipped down during the period after a hike in the corresponding period of FY08.
The IIL imports more than 80% of its raw materials and due to depreciation of Pak rupee, the cost of sales increased for the company. Also, an amount of Rs 548.787 million was included in the cost of sales on account of provision for impairment of raw material, work-in-process and finished goods inventory reducing the value to its estimated net realizable value, in accordance with the International Accounting Standards.
This provision further raised the cost of sales. The gross profit for the period was 29% lower as compared to during HY08. The financial charges also increased by 42% as mark-up on long term and short term increased due to the prevailing tight monetary policy. IIL also experienced an unrealized gain on a forward contract outstanding on June 30, 2008 amounting to Rs 49 million.
All these factors hampered the profitability of the company and it was the other operating income that boosted the profits of the company for the period. The income from non-financial assets contributed to higher (140%) other operating income.
The company generated Rs 73 million from power generation and Rs 2.682 million from gain on sale of property, plant and equipment. The company earned Rs 81 million on account of exchange gains from export sales. This resulted in other operating income of Rs 280 million during HY09 as against Rs 2 million in HY08. The profit after tax for HY09 was Rs 214.802 million as against Rs 287.684 million during HY08.
FINANCIAL PERFORMANCE (FY04-FY08)
International Industries Limited has exhibited a consistent growth in overall sales over the years despite the upward pressure on increased zinc and steel prices. Total sales in the fiscal year 2007-08 almost exceeded 180,000 tons with export sales showing recovery compared to FY07 when there was a 1% decrease in sales volume primarily due increased competition from the China in the European markets.
Hence the company decided to withdraw from these markets and concentrated on the near home markets of South Asia and the Middle East. In FY08, the companys exports increased by 24% to its highest ever level of 50,000 tons. However, the domestic sales, which accounted for around 72% of the overall sales for FY07-08, declined by 2% due to a decrease in sales of galvanized pipes in the local market.
The company performed well despite the rising freight costs and steel prices that pushed up companys costs and negatively impacted its profits in the first half of FY08. But the company showed prudence and purchased steel in advance at economical prices in the latter half of the year. The company also incurred an exchange loss of Rs 1.37 million due to the depreciation in rupee value against the US dollar.
In FY08, the company earned a profit after tax of Rs 705 million, which is 14% higher than Rs 612 million earned in FY07. Higher profits resulted from volumetric growth and were further boosted by other operating income on the back of gain on disposal of Available-for-Sale securities and income from power generation.
Overall, the gross margin remained flat whereas net margin declined slightly in FY08 compared to FY07 as the selling (including freight forwarding) costs rose by 23% due to increased fuel prices and administration expenses on account of increase in salaries and hiring of additional staff to run the plants added. Furthermore, ROA and ROE registered a decline in FY08 vis-à-vis last year.
Returns on assets decreased slightly because of lower NI growth (14%) compared to the growth (of 24%) in companys assets base (due to the companys planned capital expenditure). Return on common equity declined considerably because of a 62% increase in equity in FY08 backed by increase in paid-up capital and reserves of the company.
The current ratio of FY08 increased to 1.19 from 1.17 in FY07. This is because of higher growth in current assets backed by an extraordinary increase in the cash and bank balances of IIL from Rs 4 million in FY07 to Rs 28 million in FY08. However, steel prices have fluctuated during the past six months so much so that steel price doubled between the beginning and end of the financial year and this could exert pressure on the liquidity of the company.
Inventory is a major portion of IILs Current Assets and thus without this less liquid asset we get a more realistic picture of the companys short-term liquidity position. Quick ratio declined from FY07 level of 0.51 to 0.34 in FY08. This is because the quick assets of the company decreased from Rs 2.5 million in FY07 to Rs 1.8 million. Quick assets were lower, despite major increase in cash and bank balances and trade debts.
This is because of the short-term investments, which were prime driver behind the increase in QR of FY07, were not made by the company in FY08. There has been an increase in both ITO and DSO in FY08 by 14 and 8 days respectively, thus increasing an overall operating cycle to 181 days from 159 days during FY07. This is due to higher trade debts and inventory in FY08 compared to previous years.
The rising trend in the companys days sales outstanding meant that the company is following an easy credit policy to encourage sales. International Industries Limited has developed a formal approval process whereby credit limits are applied to its customers. The management continuously monitors the credit exposure towards the customers and makes provision against those balances considered doubtful of recovery.
Owing to growing assets base due to increased capital expenditure, total asset turnover ratio had declined in FY07. In FY08, the TATO improved slightly because the Net sales of the company registered a relatively higher growth than the assets base. In contrast the sales/equity ratio decreased because of higher equity issuance than sales growth. International Industries Limited has an equity base of over Rs 3.8 billion.
The companys D/E and the LTD/E ratios declined in FY08, despite additional borrowing for the planned capital expenditure, because the equity base of the company widened in this fiscal year, mainly due to the stock dividends (bonus issues), coupled with retained earnings and reserves growth. This is further augmented by the trend of debt ratio, which has decreased from 73% in FY07 to 64% in FY08. This means that the company has now a relatively smaller portion of total assets financed by creditors.
Amid rising interest rate regime, one can clearly see a drastic impact on the companys interest covering ability which has declined from 11.7 times in FY04 to only 3.03 times in FY08. This means that company needs to further improve its operating profits so as to offset the rising mark-up charges on its redeemable capital and short term borrowing, which have increased considerably in the later years owing to the high-interest rate regime.
Overall the stock price of the company has been volatile and has not outperformed the KSE 100-idex benchmark since 2004. However, the P/E multiple has surged in FY07 and FY08 on account of lower EPS, which in turn, is on the back of higher shares outstanding (due to stock dividends). The BVPS of the company has increased in FY08 owing to higher equity base than o/s shares. The DPS though has declined over the years, it has been regular showing good returns and prudent dividend policy of IIL.
FUTURE OUTLOOK
The company has many ongoing expansion plans which are expected to expand its sales in the future. The companys downstream project comprising of 250,000 tons per annum cold rolling mill and a 150,000 tons per annum metal coating steel plant is planned to be located at Landhi, Karachi. This project will be turned into a subsidiary as all assets and liabilities of this project including a 18mw gas fired power plant already constructed and operational at that plot will be separated from International Industries Limited.
Initially it will be a wholly owned subsidiary of the Company but later IIL ill have a 55% stake in this subsidiary. The subsidiary would be a public limited company listed on the stock exchanges in Pakistan. This project will cost Rs 8 billion of which Rs 4 billion will be financed through equity and the other half through debt. The cost of the cold rolling and galvanized sheet project is not expected to increase despite devaluation of the rupee and increase in financial charges.
So far, company has been financing this project. Company will generate additional capital by issuing ordinary shares. The company has been making huge capital expenditure to expand its Polyethylene pipe division alongside the proposed Cold Rolled and Metal coated steel sheet project. This will increase the capacity of the company and enable it to meet demand.
Demand for International Industries Ltds products was expected to rise internationally in the future as many countries were investing in their infrastructure, housing, transport and industrial sectors. IIL is the leading exporter of welded steel pipes and tubes from Pakistan and is selling its products in all continents. However, the sales growth for IIL may remain subdued as the international economic downturn may cause the demand to go down.
Similar is the case with the local market and domestic sales. To improve sales, the company must focus on the international market especially as current margins on exports are better due to rupee depreciation. The future profitability of the company also depends on how prudently the company deals with competition from new market entrants, rising interest rates and changes of tariffs.
In the future management needs to be cost conscious and monitor and control expenditure to avoid the margins from being eroded. Considering the companys past ability to maintain its market leadership and performance standards, one can expect an overall positive outlook for it.
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INTERNATIONAL INDUSTRIES LIMITED - KEY RATIOS
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PROFITABILITY FY04 FY05 FY06 FY07 FY08
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Gross profit margin 19.90% 14.28% 18.47% 16.68% 16.62%
Profit margin 8.70% 5.25% 6.95% 6.32% 5.84%
Return on Asset 9.27% 7.55% 10.17% 7.13% 6.64%
Return on Common Equity 26.91% 21.79% 26.68% 26.17% 18.61%
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LIQUIDITY RATIO FY04 FY05 FY06 FY07 FY08
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Current Ratio 1.17 1.19 1.21 1.17 1.19
Quick Ratio 0.29 0.25 0.49 0.51 0.34
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ASSET MANAGEMENT FY04 FY05 FY06 FY07 FY08
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Inventory Turnover(Days) 171 133 96 125 139
Day Sales Outstanding (Days) 35 26 28 34 42
Operating cycle (Days) 206 159 125 159 181
Total Asset turnover 1.07 1.44 1.46 1.13 1.14
Sales/Equity 3.09 4.15 3.84 4.14 3.19
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DEBT MANAGEMENT FY04 FY05 FY06 FY07 FY08
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Debt to Asset 66% 65% 62% 73% 64%
Debt/Equity (Times) 1.90 1.89 1.62 2.67 1.80
Times Interest Earned (Times) 11.71 5.88 5.02 3.20 3.03
Long Term Debt to Equity(%) 18% 19% 14% 45% 30%
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PER SHARE FY04 FY05 FY06 FY07 FY08
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Earning per share 24.13 8.72 12.47 10.77 8.47
Price earning ratio 6.76 12.05 9.49 13.76 14.30
Dividend per share 10.00 3.75 5.00 3.75 2.50
Book value 89.65 40.01 46.73 41.15 45.51
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process.
[The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].