International Steel Limited (ISL) is a fully owned subsidiary of International
Industries Limited (INIL), which is one of the pioneers in the steel sector of
Pakistan. Besides steel the INIL group has successfully ventured in cables and
chemical business. INIL is planning to divest 45% of its holding in ISL through an
offer for sale, which comprised a book building process (14.32%) at a floor price of
PKR 12.9/share, a general public offering (6.23%) and a private placement to
foreign investors (4.74%). Moreover, 10% and 9.7% stakes are being offered to
IFC and Sumitomo Corporation, respectively at a 20% discount to the Strike Price.
The project of ISL was initiated by INIL in November 2006 with the cost of PKR
8.7bn having debt to equity ratio of 50%. The project has an installed capacity to
produce 250,000 tons of cold rolled coils (CRC) and 150,000 tons of Hot Dipped
Galvanized Coils (HDGC). The Company will use 150,000 tons of CRC to further
process and convert it into HDGC. To ensure continued and cheap power supply,
ISL has built an 18MW co-generation power plant. ISL has achieved commercial
production in January 2011.
Cold Rolled Coil is produced through rolling of hot rolled flat steel to the required
final thickness. The resultant provides superior ductility and strength. CRC is
mainly used in Automotive Parts, Electrical Motors, Lighting Ballasts,
Racking/Shelving, Doors and Drums etc.
Hot Dipped Galvanized Coil is manufactured through the further processing of
CRC. Typical applications of HDGC include household peripherals, roofing, pipe
manufacturing and electrical appliances.
The country is facing a severe shortage of steel as domestic production only
meets 40% of the total demand, which stands around 6.2mn tons per annum.
Pakistan is amongst the lowest steel consumer in the region with per capita
consumption of 37kgs compared to 207.8kgs in the region and 178.9kgs globally.
In CRC segment, FY11 demand is expected around 507,000 tons, where as
domestic production can only fulfill 21.7% (110,000 tons), leaving a sufficient
enough room for ISL’s 250,000 tons capacity. Similarly in HDGC, FY11 demand is
approximated around 315,000 tons compared to domestic production of 30,000
tons, creating the supply deficiency of 90%. Besides huge supply deficit, domestic
manufacturers enjoy an import duty cover of 10% on CRC and HDGC, giving the
Company an opportunity to charge premium on its products.
We believe that the ISL posses huge potential to generate returns for the investors.
However, slow recovery in GDP and LSM growth do raise some risks, though
considering huge demand deficit we expect that ISL would not face a low capacity
utilization threat going forward. We will be coming up shortly with an investment
case for the ISL.