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Pakistan Steels: Earnings to show broad recovery in 3Q results

We expect the three steel companies in our coverage – ISL, ASTL & MUGHAL – to post impressive 47% QoQ growth in 3QFY17 earnings on account of gross margin improvement. 1H is generally weak for earnings as input prices of raw material tend to creep up during winters; 3Q is likely to depict normalization thereof.

ISL’s earnings growth in 3Q is expected on the back of impressive sales growth along with a normalized ETR. ASTL should post a growth of 5% QoQ on account of better rebar sales but a 28% decrease on YoY basis due elevated scrap prices. MUGHAL’s earnings will improve due to normalization of GMs, lower in 2Q due to untimely procurement of expensive scrap.

We maintain our Buy stance on ISL (TP: PkR153) and MUGHAL (TP: PkR78) while we are Neutral on ASTL (TP: PkR91). ISL is our top pick among the three based on a 3yr EPSCAGR of 86%; concerns on imposition of stay order of antidumping duty will likely subside, in our view.