External broker reports(aggregated public sources), Topline Securities

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Equity Bottom-Up

International Industries / Equity Bottom-Up

<ul>
<li>We revise down our earnings estimates of International Steel (ISL) post 1) our survey of Karachi steel market to understand local/imported sales dynamics &amp; pricing differences and 2) lower than estimated 1QFY19 result.</li>
<li>We expect ISL to post EPS of Rs9.2/9.9 for FY19/20, down on average by 28% from our earlier estimates.</li>
<li>However, we maintain our ‘Buy’ call on ISL (the company has lost around 25% in its share price in 2018YTD) as our DCF based Dec-2019 target price of Rs95 offers total return of 21% (including dividend yield of 6%) from its last close.</li>
<li>During our visit to steel market we found imported Cold Rolled Coils (CRC) and Hot-dip Galvanize Coil (HDGC) being sold from various countries. This is in-line with our view that imported steel will continue to be sold in local market. Please refer to our report titled ‘International Steels (ISL): Earnings revised downward, ‘BUY’ maintained’, dated Jul 5, 2018.</li>
<li>Continuation of imported CRC/HDGC coupled with their discounted prices have led us to revisit our volumetric assumption of ISL. We have cut down our FY19/20 utilization assumption of ISL to 60/62% from earlier 75/75%.   </li>
<li>We continue to hold our assumption of local manufacturers’ inability to pass on hike in domestic input cost factors like gas prices. Recent hike of 30% hike in gas tariff is likely to increase ISL’s cost by around Rs300mn, translating into negative impact of 0.5ppt on its GP margins.</li>
<li>We have assumed gas price hike of 10% and 8% in FY20 and FY21, respectively. This will reflect 0.2ppt decline in the company’s GP margin going forward.</li>
<li>Key risks to valuation/earnings include: 1) higher than expected increase in gas prices, 2) lower CRC‐HRC spread, 3) Dumping of steel from other countries, 4) disrupted gas supply, and 5) lower utilization level.</li>
</ul>


We revise down our earnings estimates of International Steel (ISL) post 1) our survey of Karachi steel market to understand local/imported sales dynamics &amp; pricing differences and 2) lower than estimated 1QFY19 result.
We expect ISL to post EPS of Rs9.2/9.9 for FY19/20, down on average by 28% from our earlier estimates.
However, we maintain our ‘Buy’ call on ISL (the company has lost around 25% in its share price in 2018YTD) as our DCF based Dec-2019 target price of Rs95 offers total return of 21% (including dividend yield of 6%) from its last close.
During our visit to steel market we found imported Cold Rolled Coils (CRC) and Hot-dip Galvanize Coil (HDGC) being sold from various countries. This is in-line with our view that imported steel will continue to be sold in local market. Please refer to our report titled ‘International Steels (ISL): Earnings revised downward, ‘BUY’ maintained’, dated Jul 5, 2018.
Continuation of imported CRC/HDGC coupled with their discounted prices have led us to revisit our volumetric assumption of ISL. We have cut down our FY19/20 utilization assumption of ISL to 60/62% from earlier 75/75%.   
We continue to hold our assumption of local manufacturers’ inability to pass on hike in domestic input cost factors like gas prices. Recent hike of 30% hike in gas tariff is likely to increase ISL’s cost by around Rs300mn, translating into negative impact of 0.5ppt on its GP margins.
We have assumed gas price hike of 10% and 8% in FY20 and FY21, respectively. This will reflect 0.2ppt decline in the company’s GP margin going forward.
Key risks to valuation/earnings include: 1) higher than expected increase in gas prices, 2) lower CRC‐HRC spread, 3) Dumping of steel from other countries, 4) disrupted gas supply, and 5) lower utilization level.


International Steel (ISL): Earnings Revised Downward ‘Buy Maintained’

<ul><li>Investment Thesis: We initiate coverage on International Industries (INIL), Pakistan’s leading producer of tubular steel products with a ‘Buy’ call. We expect INIL to benefit from, 1) growth in International Steel Limited (ISL), which is Pakistan’s leading flat steel manufacturer and adds 81% to INIL’s valuation, 2) rising demand from autos, construction sector, and 3) ongoing construction of Liquefied Natural Gas (LNG) pipelines. After incorporating these factors, we expect INIL to post 3-Year (FY19-21) revenues and earning CAGR of 22% and 29%, respectively. Our INIL’s Sum-Of-The-Parts (SOTP) valuation is Rs 428/share.</li><li>INIL holds 56% of International Steel (ISL): INIL holds 56% in ISL, which is Pakistan’s leading coated steel producer. ISL can cater to more than 50% of the coated steel demand in Pakistan. ISL is in process of boosting its Cold-Rolled Coils (CRC) capacity by 450k tons taking its total CRC capacity to 1.0mn tons by 4QFY18. This expansion and growing demand of coated steel is likely to bode well for INIL as ISL comprises around Rs348 (or 81%) of INIL’s total SOTP. ISL's current production mix comprises of 100k tons of CRC, 350k tons of Galvanized Steel Products (GP) and 50k tons of Color Coated Steel, which are offered in coil or sheet form.</li><li>ISL to remain main earnings driver: ISL in FY17 contributed around 67% revenue to INIL’s sales and added 62% to INIL earnings. We anticipate INIL’s earnings to grow at a 3-year (FY19-21) CAGR of 29% mainly on the back of sharp earnings growth in ISL. ISL will remain a major beneficiary of growing auto, consumer demand and construction activity in Pakistan. Pakistan’s auto sales are expected to grow at 3-Year (FY19-21) CAGR of 11%. Consumer demand for appliances is also set to grow at 5-8% per year on back of macro improvement, rise in income levels &amp; improvement in electricity supply. Construction surge from China Pakistan Economic Corridor (CPEC) &amp; Govt. spending would require downstream products (pipes, tubes, railings, roofing, flooring, wall décor, etc) demand, which is expected to post 3-Year (FY19-21) CAGR of 10%. </li><li>ISL expansion to further boost INIL’s earnings prospects: ISL is undergoing expansion that aims to boost the company’s CRC capacity by 450k tons to 1.0mn tons with commissioning expected in 4QFY18. We forecast ISL revenues and earnings to grow at 3-Year (FY19-FY21) CAGR of 28% and 34%, respectively; we have assumed  volumetric sales to grow at 22%, while prices are expected to increase by 10% during the same period. We have kept margins stable at around 18% vs. average of 13% in last 3 years as anti-dumping duties (ADD) on CRC &amp; GP will curtail imports. To recall, National Tariff Commission (NTC) in Jan 2017 imposed ADD on CRC imports from China &amp; Ukraine ranging 14-19%, and Galvanized sheets from China ranging 6-40%. This duty has been imposed for 5-years (2017-2021). This will curtail imports, improve market share &amp; boost pricing power, we believe. NTC has imposed provisional duties on color coated sheets from China (2.4-6.8%), South Africa &amp; Others (37%). Apart from CRC and GP, color coated sheets is the third major product for ISL.</li><li>INIL’s steel pipe to be the major beneficiary of auto &amp; construction boom: Along with major contribution from ISL, INIL is likely to benefit from boom in auto and construction sector. Rise in two and three wheeler auto sales will give boost to demand in steel tubes manufactured by INIL, we believe. Similarly, rise in construction activity will give boost to plumbing pipes that bodes well for INIL.</li><li>Construction of LNG pipeline to lift demand for API lines: Ongoing LNG projects in the country have led to upgrade and construction of both transmission and distribution network of local gas distribution companies, which have opened large business opportunities. INIL being the largest producer of American Petroleum Institute (API) pipeline in Pakistan, is likely to benefit from expansion of distribution post construction of LNG III pipeline. </li><li>Trading at significant discount to its SOTP: INIL’s SOTP valuation comes to Rs428/share, which is at a 32% discount to current market price. Moreover, it is trading at FY19 PE of 6.6x versus market PE of 8.0x. </li></ul>Risks: Key risks for the company includes 1) exchange rate volatility, 2) delay in LNG pipeline projects, 3) surge in raw material prices, 4) slowdown in auto sales, construction activity &amp; white good sales and 5) volatility in global margins.

Investment Thesis: We initiate coverage on International Industries (INIL), Pakistan’s leading producer of tubular steel products with a ‘Buy’ call. We expect INIL to benefit from, 1) growth in International Steel Limited (ISL), which is Pakistan’s leading flat steel manufacturer and adds 81% to INIL’s valuation, 2) rising demand from autos, construction sector, and 3) ongoing construction of Liquefied Natural Gas (LNG) pipelines. After incorporating these factors, we expect INIL to post 3-Year (FY19-21) revenues and earning CAGR of 22% and 29%, respectively. Our INIL’s Sum-Of-The-Parts (SOTP) valuation is Rs 428/share.INIL holds 56% of International Steel (ISL): INIL holds 56% in ISL, which is Pakistan’s leading coated steel producer. ISL can cater to more than 50% of the coated steel demand in Pakistan. ISL is in process of boosting its Cold-Rolled Coils (CRC) capacity by 450k tons taking its total CRC capacity to 1.0mn tons by 4QFY18. This expansion and growing demand of coated steel is likely to bode well for INIL as ISL comprises around Rs348 (or 81%) of INIL’s total SOTP. ISL's current production mix comprises of 100k tons of CRC, 350k tons of Galvanized Steel Products (GP) and 50k tons of Color Coated Steel, which are offered in coil or sheet form.ISL to remain main earnings driver: ISL in FY17 contributed around 67% revenue to INIL’s sales and added 62% to INIL earnings. We anticipate INIL’s earnings to grow at a 3-year (FY19-21) CAGR of 29% mainly on the back of sharp earnings growth in ISL. ISL will remain a major beneficiary of growing auto, consumer demand and construction activity in Pakistan. Pakistan’s auto sales are expected to grow at 3-Year (FY19-21) CAGR of 11%. Consumer demand for appliances is also set to grow at 5-8% per year on back of macro improvement, rise in income levels &amp; improvement in electricity supply. Construction surge from China Pakistan Economic Corridor (CPEC) &amp; Govt. spending would require downstream products (pipes, tubes, railings, roofing, flooring, wall décor, etc) demand, which is expected to post 3-Year (FY19-21) CAGR of 10%. ISL expansion to further boost INIL’s earnings prospects: ISL is undergoing expansion that aims to boost the company’s CRC capacity by 450k tons to 1.0mn tons with commissioning expected in 4QFY18. We forecast ISL revenues and earnings to grow at 3-Year (FY19-FY21) CAGR of 28% and 34%, respectively; we have assumed  volumetric sales to grow at 22%, while prices are expected to increase by 10% during the same period. We have kept margins stable at around 18% vs. average of 13% in last 3 years as anti-dumping duties (ADD) on CRC &amp; GP will curtail imports. To recall, National Tariff Commission (NTC) in Jan 2017 imposed ADD on CRC imports from China &amp; Ukraine ranging 14-19%, and Galvanized sheets from China ranging 6-40%. This duty has been imposed for 5-years (2017-2021). This will curtail imports, improve market share &amp; boost pricing power, we believe. NTC has imposed provisional duties on color coated sheets from China (2.4-6.8%), South Africa &amp; Others (37%). Apart from CRC and GP, color coated sheets is the third major product for ISL.INIL’s steel pipe to be the major beneficiary of auto &amp; construction boom: Along with major contribution from ISL, INIL is likely to benefit from boom in auto and construction sector. Rise in two and three wheeler auto sales will give boost to demand in steel tubes manufactured by INIL, we believe. Similarly, rise in construction activity will give boost to plumbing pipes that bodes well for INIL.Construction of LNG pipeline to lift demand for API lines: Ongoing LNG projects in the country have led to upgrade and construction of both transmission and distribution network of local gas distribution companies, which have opened large business opportunities. INIL being the largest producer of American Petroleum Institute (API) pipeline in Pakistan, is likely to benefit from expansion of distribution post construction of LNG III pipeline. Trading at significant discount to its SOTP: INIL’s SOTP valuation comes to Rs428/share, which is at a 32% discount to current market price. Moreover, it is trading at FY19 PE of 6.6x versus market PE of 8.0x. Risks: Key risks for the company includes 1) exchange rate volatility, 2) delay in LNG pipeline projects, 3) surge in raw material prices, 4) slowdown in auto sales, construction activity &amp; white good sales and 5) volatility in global margins.

International Industries (INIL): Beneficiary of Construction and Auto Sector Boom

Pakistan

International Industries Limited manufactures cold rolled steel strips, steel tubes and galvanized piping products.

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International Industries (INIL PA)

International Steel (ISL): Earnings Revised Downward ‘Buy Maintained’

We revise down our earnings estimates of International Steel (ISL) post 1) our survey of Karachi steel market to understand local/imported sales...

Topline Securities

International Industries (INIL): Beneficiary of Construction and Auto Sector Boom

Investment Thesis: We initiate coverage on International Industries (INIL), Pakistan’s leading producer of tubular steel products with a ‘Buy’...

Topline Securities

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