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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 dynamics & 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.