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International Industries (INIL): Slower growth and Imports to dent Earnings 'BUY' maintained

• We revise down our EPS forecast for International Industries (INIL) by around 25% for FY19/20 to Rs24.6/27.0. Lower earnings are attributed to decline in earnings estimates of International Steels (ISL) by 28%. Please refer to our report on ISL titled as ‘Earnings revised downward; BUY maintained’ on Oct 25, 2018.
• ISL earnings were trimmed after our visit to Karachi’s steel market, where we observed influx of imported CRC from European, North American, and some Asian countries (including China and Russia). The availability of imported flat steel products (at somewhat discounted rates) and lower anticipated economic growth prompted us to reduce our utilization assumption of ISL to 60/62% during FY19/20 vs. 75% earlier.
• On Nov 08, 2018, INIL notified exchange regarding imposition of provisional duties on import of Circular Welded Steel Pipe (CWSP) by Canada from Pakistan, Philippines, Turkey and Vietnam. Duty applicable on INIL is 10.1% vs. 58% on all other exporters of Pakistan (CWSP). Similarly, duties on other countries ranges between 3.0%-95%.
• Canada’s Imports from Pakistan, Philippines, Turkey and Vietnam constitute around 48% of overall CWSP imports where Pakistan’s contribution is 5.4% as per Canadian Border Service Agency (CBSA).
• INIL exports to Canada were valued at Rs1.3bn or 5% of total sales during FY18, which we believe is insignificant in nature and will not have material impact on INIL’s bottom-line.
• In unconsolidated accounts, INIL recorded over 20% YoY decline in volumes during 1QFY19 due to delays in gas utility companies orders. In polymer business, revenues were down by 35% YoY amidst lower tender based spending during the 1QFY19.
• We maintain our ‘BUY’ call on INIL, as stock is trading at discount of 30% from its SOTP value of Rs251 per share (earlier Rs297), offering dividend yield of 6%.
• Key risks to valuation/earnings include: 1) competition in tender based business, 2) imposition of dumping duties by other countries on Pakistan, 3) unfavorable decision regarding GIDC, 4) lower than expected volumetric sales, and 5) volatility in global margins.