Earnings Report /
Pakistan

Mughal Iron & Steel Industries: 3QFY22 review – weak ferrous margins lead to earnings miss

  • MUGHAL has posted a NPAT of PKR0.8bn (EPS: PKR2.50) for 3QFY22, down 24% yoy and 54% qoq

  • Revenues have clocked in at PKR15.1bn, up c.46% yoy but down c.16% qoq

  • MUGHAL has posted gross margins of c.12.1%, down a sharp c.9ppt yoy and c.4ppt qoq

Ali Aziz Soorty
Intermarket Securities
28 April 2022

MUGHAL has posted a NPAT of PKR0.8bn (EPS: PKR2.50) for 3QFY22, down 24% yoy and 54% qoq. This takes 9MFY22 NPAT to PKR4.4bn (EPS: PKR13.02), up 74% yoy. The 3Q result has come in substantially lower than our projected EPS of PKR4.31, where the major variance has emanated from (i) depressed local sales volume, and (ii) lower-than-expected gross margins.

Key takeaways from 3QFY22 result:

  • Revenues have clocked in at PKR15.1bn, up c.46% yoy but down c.16% qoq. It is lower than our expectation of PKR19bn, due to lower volumetric offtake. On a qoq basis, the decline in revenues is due to depressed construction activities during the first half of the quarter (prolonged Winter season and competition from the ungraded sector).

  • MUGHAL has posted gross margins of c.12.1%, down a sharp c.9ppt yoy and c.4ppt qoq, lower than our expectation of c.13.5%. The decrease in margins is attributed to weak Ferrous segment margins (c.6% in 3Q) amid elevated scrap and energy costs, in our view. Non-ferrous segment margins remained flat qoq at c.28%.    

  • Distribution costs are down 36% yoy (while more than doubling qoq) to PKR92mn, likely due to lower sales volumes during the quarter, in our view. Admin expenses declined by 3% yoy. 

  • Finance cost has clocked in at PKR781mn, more than doubling yoy due to (i) increase in short-term debt amid greater borrowing on account of raw material stocking, and (ii) increase in the policy rate. Additionally, the company booked a tax reversal in 3Q, vs. an ETR of 13.2% in 3QFY21. 

MUGHAL has posted a weak result; mostly due to depressed Ferrous segment revenues and profitability (elevated input costs).  Copper segment margins, however remained robust in 3QFY22 and played a major role in lifting margins. Going forward, we assume Copper segment margins to moderate to sustainable levels in the coming quarters amid normalizing copper prices globally. An uptick in construction activity amid subsidized loan disbursements will support rebar volumes in the coming quarters, in our view. Also, enhanced copper flows will positively contribute to the overall profitability, in our view. We have a Buy stance on MUGHAL with a June 2023 TP of PKR121/sh.