MUGHAL has posted a NPAT of PKR1.1bn (EPS: PKR3.80) for 3QFY21, compared with a NPAT of PKR33mn in SPLY, up a massive 33x yoy and 6% qoq. This has taken aggregate 9MFY21 NPAT to PKR2,508mn (EPS: PKR9.97) compared with 9MFY20 NPAT of PKR400mn (EPS: PKR1.59). The 3Q result has come in below our projected EPS of PKR4.53, where the variance emanated from substantially lower-than- expected revenue.
Key takeaways from 3QFY21 result:
Revenue has clocked in at PKR10.3bn, up 44% yoy but surprisingly down 11% qoq from PKR11.7bn in 2QFY21. We had expected a revenue of PKR14.3bn. The qoq decline in revenue is surprising because (i) average copper prices rose 18% qoq and, (ii) average scrap prices rose 31% qoq (which pushed up the prices of finished long steel products). This indicates that there was a substantial sequential decline in sales volume, in our view.
MUGHAL has posted gross margins of 21%, well above our expectations of 15%; this can be attributed to higher than expected inventory gains – as MUGHAL must have been holding on to inventory acquired even before 2QFY21.
Distribution costs rose c.3x qoq to PKR144mn from PKR39mn, likely attributed to (i) a surge in freight costs, and (ii) higher proportion of exports. Another major deviation stemmed from other expenses increasing 154% qoq to PKR231mn; we await quarterly accounts for further clarity on the matter.
Finance costs clocked in at PKR354mn up 19% qoq; this is likely due to an increase in debt for capex purposes, as the company plans to increase its melting capacity in line with rising demand for long steel. Additionally, effective tax rate for the quarter was 14.8%, slightly above our estimate of 14.0%.
The result has come in below our expectations, mostly due to lower-than-expected sales volume. This is likely to recover based on (i) continued demand momentum from the construction space, (ii) increase in copper exports as capacity increases, and (iii) higher demand stirred by lower copper and scrap prices in the coming months. MUGHAL also approved a PKR620mn capital expenditure budget for upgradation of their girder mill, and civil works for their warehouses and sales centers. We have a Buy stance on MUGHAL with a June 2022 TP of PKR126.0/sh.