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International Industries (INIL): Earnings revised downward, ‘BUY’ maintained

• We have revised down our earnings estimate of International Industries (INIL) for FY18, FY19 and FY20 by 2%, 23%, and 33% respectively. Downward revision in earnings is attributed to 1) revision in its subsidiary's International Steel (ISL) earnings, and 2) expectation of slowdown in economy.
• We revised down earnings of International steels (ISL) by average 18% during our projected years amid oversupply concerns after commencement of new CRC plants by Aisha Steels (ASL) and Siddiqsons Tin Plate (STPL). Furthermore, we expect slowdown in historical 3-year (FY16-18E) flat steel industry CAGR  of 12% to 6% amid concerns on economic slowdown and ~25% rise in flat steel prices. Please see our recent publication on ISL titled ‘Earnings revised downward, ‘BUY’ maintained’ dated Jul 05, 2018.
• For the company’s steel pipe business we have revised down our volumetric sales assumption by 10-20% due to expected slowdown in economy, that would restrict spending on infrastructure and construction sector.
• During last five years (FY13-17) INIL’s steel segment sales have hovered around 195k to 220k tons, that implies average utilization of ~40%. While, FY18 is expected to attain record volume of ~260-280k tons amid high tender based business and strong domestic demand, taking utilization to clock in at around 55%.
• We expect this trend to somewhat persists in FY19 as INIL has been awarded with two tenders as per details available on Public Procurement Regulatory Authority (PPRA). One for 12” dia bare line pipe API and other in plastic division for P.E pipe (1.3mn meters) of ¾” and 2”.
• Along with this, two more projects under pipeline of SSGC, of which tender for one project is already floated. Cumulative value of both tenders is around ~Rs2bn (as reported in ERR of SSGC). After completion of sui companies tenders, we believe volumetric uptick in INIL’s pipe segment will remain at lower level given slowdown in economy as we expect GDP to slowdown to 4.6%, 4.7% and 5.1% in FY19, FY20, and FY21 respectively from FY18E level of 5.7%. As a result we expect INIL’s earnings to fall by 2%, 23% and 33% from our earlier estimates to clock in at Rs28.8, Rs34.6, and Rs35.3 during FY18/19/20 respectively.
• We maintain our BUY call as INIL is currently trading at discount of 32% from its sum of the parts value of Rs297 per share (earlier Rs428). INIL has shed around 51% from its peak of Rs400/share as of May 29, 2017 and has underperformed market by 27%.
• Key Risks: Key  risks to our earnings/valuation will emanate from 1) lower than expected volumetric sales, 2) lower margin tenders, 3) volatility in global margins, and 4) dumping of steel from other countries.