Earnings Report /
Pakistan

Mughal Iron & Steel Industries: 3QFY20 review: Lower earnings on account of soaring finance costs

  • MUGHAL posted NPAT of PKR33mn (EPS: PKR0.13), compared to NPAT of PKR362mn (EPS: PKR1.44), down 91%/ 67% (yoy / qoq)

  • Gross margin in 3Q came in at 8.8%, marginally lower than our expectations of 9.1%, in the backdrop of stiff competition

  • Finance cost rose to PKR505mn, up 140% / 47% (yoy/qoq), due to an increase in short term borrowings

Intermarket Securities
30 April 2020

MUGHAL posted NPAT of PKR33mn (EPS: PKR0.13), compared to NPAT of PKR362mn (EPS: PKR1.44) in SPLY, down 91% / 67% (yoy/qoq). This has taken aggregate 9MFY20 NPAT to PKR400mn (EPS: PKR1.59). The result came below our projected NPAT of PKR130mn (EPS: PKR0.52), where the deviation originates from: (i) higher-than-expected finance cost and (ii) lower volumetric sales. 

Key takeaways from 3QFY20 result include:

Net Sales clocked in at PKR7.2bn, up by 5% yoy, largely on the back of higher prices. On a sequential basis, however, they are lower by 2% qoq. They are slightly lower than what we projected, primarily due to lower than expected volumetric sales, in our view. Sales were negatively impacted due to Covid-19 and slowdown in construction activities from mid of 3QFY20.

Gross margin in 3Q came in at 8.8%, marginally lower than our expectations of 9.1%, in the backdrop of stiff competition on the local side. However, this was a substantial improvement from c.7.0% previous quarter, supported by lower scrap prices. 

Distribution expenses plummeted 47% yoy, staying flat on a sequential basis (in-line with our estimates). MUGHAL enjoys lower distribution expenses relative to peers, due to its efficiently integrated network in the North. MUGHAL was aggressively promoting its premium rebar last year in a tough market (so did ASTL), which can also explain the sharp drop in distribution expenses. 

Finance cost depicted a staggering rise, coming in at PKR505mn, up 140% / 47% (yoy/qoq). We think that the evident increase in short term borrowings (from c.PKR11.5bn at the end of 1HFY20), indicate an increase in working capital requirement (amid weak demand in March).

A Tax credit of PKR47mn was availed, similar to the previous quarter. We think the credit has been claimed on the back of recent expansions in the pipeline (expected to come online by end of FY20 or during FY21).