Steel Q2 Preview: Strong demand to drive earnings

January 20, 2021 (MLN): Increase in sales led by a broad-based surge in demand from the construction space, 2/3 wheelers and other segments have made market participants optimistic about an upswing in the profitability of the steel sector during 2QFY21.

The steel sector is likely to grow by 83% YoY to post a cumulative 2QFY21 net profit after tax of PKR1,873 million.

After the resumption of economic activities, market sources are buoyant that metal prices will remain strong in the near term amid a significant rise in rebar prices and other several price hikes in the second half of FY21.

According to a preview report by Intermarket Securities, the profitability of ISL is likely to jump more than 9- folds to PKR1.12 million (EPS: PKR 2.58) during 2QFY21 when compared to net profits of PKR118 million during the same period last year.  Healthy demand from 2/3 wheelers (up by16% YoY), and other flat steel reliant industries point towards robust sales are likely to contribute to the growth. The company might witness a 25% YoY in its revenue due to several price hikes during the period. CRC-HRC spreads also improved during the quarter, averaging US$136/ton, up 69% QoQ. It is expected that gross margins to clock in at 12.6% (vs 8.9% during 1Q).

Amreli Steels (ASTL), too, is likely to post a net profit of PKR200 million (EPS: PKR0.67) for 2QFY21, which will come off a loss last year (LPS: PKR0.78) while better than the previous quarter’s result (1QFY21 EPS: PKR0.37). The company is expected to improve profitability for the 2nd consecutive quarter with healthy gross margins (11.2% expected during 2Q vs. 7.9% in SPLY). This is backed by a strong demand post easing of lockdowns, no more electricity one-offs, and the ability to pass on any cost pressures through price increments. Besides, the brokerage house expects that the improvement in earnings also stems from lower finance cost (drop-in interest rates to 7%), expected 40% lower YoY.

As per the projections put forwarded in the report, Mughal Steel (MUGHAL) is likely to post net profits of PKR551mn (EPS: PKR2.19) for 2QFY21, compared to profits after tax of PKR102mn (EPS: PKR0.41) in the corresponding period last year. The expected earnings growth emanates from higher sales, which is inspired by increased cement dispatches during 2Q (up 17% QoQ and 12% YoY). Net sales is likely to grow by 34% YoY and 40% YoY on the back of a rise in rebar/girder volumes, greater exports of copper, and an increase in finished good prices. Gross margins are also expected to improve by 1.6ppt QoQ to 12.8%. The report expects MUGHAL to have exported greater copper ingots during 2Q as international copper prices surged 30% to over US$8,000/ton.

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