Since mid of Feb-2019, CRC imports from Russia and China have shown a sharp decline.
- We believe the drop in CRC imports originates from (1) recently filed cases against dumping, and (2) impact of ~12% decline in international CRC prices which was not passed on by local producers in the previous quarter.
- As a result, ISL is expected to post 3QFY19 EPS of Rs2.50. Although this reflects stagnant growth, recurring earnings (i.e. not including one-time tax credit booked in 2QFY19) are expected to grow by 72% QoQ.
Halt in dumping of flat steel a breather for local industry
Previously, despite a high degree of protection via customs, regulatory & anti-dumping duties, dumping remained a major challenge for the local flat steel industry. Recently though, lower-priced CRC imports from Russia & China have showed a sharp decline during the Feb-Mar19. For instance, in Jan-19, Russian imports in local market were available at a discount of approx. Rs7k-Rs8k/ton to locally manufactured flat steel coils. However, the discount margin started to shrink from mid of Feb-19 and is now close to negligible levels. We believe this is due to
(1) recently filed cases against dumping by Russian exporters, and
(2) CRC prices during the last quarter decreased gradually from $610/ton to $540/ton, down ~12%, whereas local manufacturer’s had previously not been passed this impact to end consumers, since they have been holding higher priced inventory. This, we believe has been cheerful for the local industry, while its impact could become visible in 3QFY19 earnings via higher volumes and margins for local flat steel producers.
ISL’s 3QFY19 recurring earnings to rise 72% QoQ
Based on our estimates, International Steels (ISL) is expected to post 3QFY19 EPS of Rs2.50, reflecting no material change from the same quarter last year. However, the catch is that we are expecting a 72% QoQ surge in recurring earnings (EPS: Rs1.45) if we exclude a one-time tax credit worth approx. Rs250mn availed by the company on its recent 450K tons CRC expansion in 2QFY19. The major reason for the forecasted upsurge in recurring earnings is due to abovementioned point pertaining to the more advantageous position that local flat steel producers now enjoy. We have assumed volumes of 60,000 tons of CRC and 80,000 tons of HDGC (i.e. 10-12% higher than 2QFY19 estimates) during the period under discussion, coupled with higher gross margins due to availability of cheap raw material and sequentially lower discounts. Finally, finance costs are likely to increase by 179% YoY to around Rs350mn on the back of fully debt-financed CRC expansion. Given the positive expectations due to the aforementioned developments, we have revised our Dec-2019 Target Price for ISL from Rs65 to Rs72.
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