Earnings Report /

Mughal Iron & Steel Industries: 2QFY22 review: Surprise payout

  • MUGHAL announced a 2QFY22 EPS of PKR5.49, slightly lower than our expectation of PKR5.89 amid lower gross margins

  • The c.1.5ppt yoy rise in gross margins is attributed to the sharp yoy rise in both rebar and copper prices, in our view

  • We have a Buy rating on MUGHAL with a June 2022 TP of PKR135/sh

Intermarket Securities
17 February 2022

MUGHAL has posted a NPAT of PKR1.8bn (EPS: PKR5.49) for 2QFY22, up a sharp c.75% yoy and c.10% qoq. The 2Q result has come in slightly lower than our projected EPS of PKR5.89, where the variance broadly has emanated from lower-than-expected gross margins. MUGHAL announced an interim dividend of PKR3.0/sh, against our expectation of no dividends (we based it on earlier announcement of non-ferrous expansion plans).

Key takeaways from 2QFY22 results:

  • Revenue has clocked in at PKR18.1bn, up a sharp c.55% yoy and c.30% qoq. It is higher than our expectation of PKR16bn, likely due to significantly greater non-ferrous segment sales, in our view. We estimate rebar sales to have clocked in at c.80,000 tons, while copper volumes to have crossed 2,000 tons during the quarter.

  • MUGHAL has posted gross margins of c.16.2%, up c.1.5ppt yoy while down c.3.5ppt qoq, lower than our expectation of c.20%. The yoy rise in margins is due to sharp increases in both rebar prices (up 50% yoy) and copper prices (up 35% yoy), resulting in elevated margins due to inventory gains, in our view.

  • Distribution costs have risen by a c.10% yoy (albeit from a low base) to PKR43mn, due to higher advertising costs and potential change in sales method to attract sales (higher freight), in our view. We understand that MUGHAL reported an allowance for expected credit loss, as did ASTL, as a provision against expected slowdown in recoveries amid economic slowdown (potentially IFRS-9).

  • Finance cost has clocked in at PKR541mn, up a staggering c.80% yoy; this is likely due to an increase in short-term debt amid greater borrowing on account of raw material stocking. Additionally, effective tax rate for the quarter was c.8%, compared with c.14% last year.

MUGHAL has posted a decent result, although slightly lower than our expectations, mostly due to increase in input costs (scrap, ferro-alloys and utilities). Copper segment margins are likely to remain healthy in the coming quarters amid strong demand for copper globally, which is likely to keep copper prices elevated, in our view. However, increase in price gap of graded and ungraded rebars and PKR3,000/ton (net) decline in rebar prices in 3Q is likely to pressure margins in light of moderating inventory gains, in our view. But, an uptick in construction activity and subsidized loan disbursements are likely to keep long steel volumes healthy in FY22, while enhanced copper flows will positively contribute to the bottom-line. We have a Buy stance on MUGHAL with a June 2022 TP of PKR135/sh.