The company's products base range from different specifications and varieties of Cold Rolled Coils (CRC), Galvanized Iron Coils (GI) and Color Coated Steel from hot rolled coils. The company has an annual capacity of 550,000 tons of rolling capacity for CRC and a hot dip galvanized steel capacity of 450,000 tons after adding a galvanized line. The Color Coil Coating facility has a capacity of 84,000 tons to produce color coated steels on various substrates including cold rolled, galvanized, aluminum and stainless steel sheets.
The company's steel is used for a range of applications in engineering, industrial and manufacturing industries domestically. The company also exports about 10-12 percent of its total sales to various international markets. The company went public in 2011.
Holding company and other shareholders
ISL is a subsidiary of IIL that holds majority stakes in the company and was itself established in 1948. The company started as a small trading company but after a series of expansions, it started to manufacture welded steel pipes and tubes; going public in 1984. The company is now a leading producer of steel and polyethylene pipes. Aside from ISL, the group established IIL Stainless Steel Pvt. Limited, which locally manufactures stainless steel tubes; and has stakes in Pakistan Cables Limited (PCL) that manufactures copper rods, wires and cables.
International Steels shareholdings are pretty concentrated toward its holding company and a foreign investor company that helped start the operations of ISL. Sumitomo Corporation holds more 9 percent of the company's shares, IIL holds more than 56 percent. JFE Steel Corporation holds 4.7 percent of the shares as at June 2017. Nearly 10 percent of the company's shares are held by the general public, both local and foreign.
Demand, modernisation and investments
There is a rising demand gap for steel in the Pakistani market-some estimate the demand of steel at 6.5 million tons which 30 percent of its being catered to by imports. But this demand is expanding and steel makers are expanding capacities year after year to cater to the growing market and bag a higher market share. In Large Scale Manufacturing growth, the iron and steel products saw a growth of nearly 17 percent during FY17 with 12 percent growth for flat steel. Construction activities, manufacturing industries such as automobiles have given impetus to growth in steel and allied industries.
In terms of expansions: Aisha Steel is raising its capacity to 700,000 tons (read Aisha Steel's Brief Recording, January 31, 2018). ISL is not behind. The company completed capacity expansions in the conversion of its compact cold rolling mill to a twin-stand reversing mill that raised capacity from 250,000 tons to 550,000 tons. It added a second galvanizing line to more than double capacity from 150,000 tons to 450,000 tons and also commissioned a color coating steel line with a capacity of 84,000 tons. The expansion was carried out at an approximate cost of Rs 3 billion. Now an additional capacity enhancement would take the company's production capabilities to 1 million tons at an investment of additional investment of Rs 5.6 billion.
The company also has its own electricity power generation facility that has a capacity of 19.2 MW of gas fired co-generation power plant. The plant generates electricity for the company's own expanding facilities and the excess energy is sold out to K-electric under a 20 year contract signed in 2007. In fact, around 1-2 percent of the company's revenues represent revenue from sale of surplus electricity to KE. This helps cut down on costs as well.
Moreover, ISL has an effluent treatment plant that filters the solvent based wastage generated by the plants. The treated waste can then be reused into production. Nearly 98 percent of the regenerated hydrochloric acid is re-used while the rest is discharged. The company's reverse osmosis generates more 100m3/hr of water to meet industrial requirements that reduces reliance on Karachi's over loaded water supply system.
ISL's recent operational and financial performance
The company has sure come a long way. Back in FY11, ISL was producing 168,000 tons of steel, which slowly grew to over 370,000 tons annually by FY16. During FY15, the company began its expansion projects and added a second stand on its reversing mill that doubled its capacity and installed a second galvanizing line with a capacity of 250,000 tons. The cold rolling mill capacity enhancement came in FY16. During the year, the company also introduced its color coating line and installed an electrolysis plant to produce hydrogen. It also started oxygen to the non-medical industry during the fiscal year.
During FY17, overall production increased with galvanizing lines and color coating lines also running. The debottlenecking of pickling line enhanced capacity from 450,000 to 600,000 tons while annealing capacity was increased from 160,000 to 200,000 tons.
With all these improvement and enhancements, revenues for ISL are flourishing. The company earned a revenue of Rs 33 billion by FY17 with greater production and higher efficiency of its plants. Other factors also helped in boosting sales including the antidumping duties imposed on Chinese steel by the National Tariff Commission (NTC) after local industries pleaded their case for over a year. China had been dumping steel all over the world with the plight of its overcapacity. Only recently the country is trying to shut down old units, limit production and focus on environment. But this is after much retaliation from the rest of the world. The antidumping duties imposed by Pakistan ranged from 13.17 to 19.04 percent and 6.09 to 40.47percent on imports of CRC and GI, respectively.
Stable global steel prices and anti-dumping duties, the company and other steel makers were allowed breathing space, sell more, increase capacity utilization and also increase their prices without worrying too much about competition.
With the power plant producing electricity, energy costs lower, and debottlenecking of plant to improve efficiency, not to mention higher selling prices, the company improved margins from 14 percent to 18 percent between FY16 and FY17. They used to be 8 percent during FY15.
Going from a loss-making company until FY12, ISL is now at Rs 3 billion in net profits with a profit margin of 9 percent, and growing by 158 percent since FY16. Capital expenditure year after year is giving back.
Outlook
The growing streak continues in the first half of FY18 for ISL. Revenues in 1HFY18 grew by 45 percent with demand coming from construction, infrastructure and other manufacturing sectors like automobiles, and appliances. Profit after tax grew by 88 percent from 1HFY17 with lower effective tax during this period. These results are testament to ISL carving its space in the steel industry.
Fluctuations in global steel prices are a prominent risk, while any rise in energy costs will also affect the company's margins. However, there are several factors that point towards the company's growing profitability in the future. With China's cheap steel at bay for a number of years, competition will not be as steep so selling prices can be increased consequently. Expansions in different product lines and improving of plant efficiencies all drive back to greater share in the expanding market size that would boost the top-line further. Growing scale to one million tons will also help in lowering costs of production and boost gross margins that are still below 20 percent.
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Pattern of Shareholding (as on June 2017)
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Categories of Shareholders Share
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Directors and their spouse(s) and minor children 3.60%
Associated Companies, and related parties 56.34%
International Industries Ltd 56.34%
Government Financial Institutions 0.32%
National Investment Trust 0.32%
Strategic Investors 9.08%
Sumitomo Corporation 9.08%
Public Companies 3.74%
Insurance Companies 1.05%
Banks, development finance institutions,
insurance, non-banking finance companies 1.87%
Foreign Companies 5.82%
JFE Steel Corporation 4.74%
Mutual Funds 8.32%
Public 9.86%
Modrabas 0.01%
Executives 0.01%
Total 100%
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Source: Company accounts
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International Steels: First Half (Unaudited)
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Mn Rs 1HFY18 1HFY17 YoY
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Sales 22,190 15,220 46%
Cost of Sales 18,417 12,387 49%
Gross Profit 3,772 2,833 33%
Administrative 117 89 32%
Distribution 206 152 36%
Other operating expenses 252 204 24%
Finance cost 232.32 236.76 -2%
Other income 75.06 53.97 39%
Profit before tax 3,040 2,206 38%
Taxation 859 1,046.23 -18%
Net profit for the period 2,182 1,160 88%
Earnings per share (Rs) 5.02 2.67 88%
GP margin 17% 19% -9%
NP margin 10% 8% 29%
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Source: Company accounts
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Capacity and Utilization
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FY17 FY16 FY15
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Name-plate Capacity
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Galvanizing 462,000 462,000 150,000
CRC 550,000 550,000 250,000
Colour coated 84,000 84,000
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Production
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Galvanizing 312,886 252,910 169,167
CRC 464,023 370,811 238,640
Colour coated 9,345 9963
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Utilization
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Galvanizing 68% 55% 113%
CRC 84% 67% 95%
Colour coated 11% 12%
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Source: Company accounts