Earnings Report /
Pakistan

Mughal Iron & Steel Industries: Q1 FY 20 review: Earnings beat on higher sales and lower effective tax rate

    Intermarket Securities
    30 October 2019

    Mughal Steels (MUGHAL) posted Q1 FY 20 NPAT of PKR264mn (EPS: PKR1.05), down 25% yoy and 11% qoq. The result, however, was better than our expected NPAT of PKR220mn (EPS: PKR0.88).

    Key highlights

    • Net sales of PKR6,678mn, up 11% yoy, which were higher than our expectation. Similar to other long companies, MUGHAL is now paying 17% sales tax compared to sales tax charged on electricity consumption previously. Hence, both revenue and cost of goods sold would have been higher if reporting was done on earlier sales tax regime. Similar to its peer, Amreli Steels (ASTL), MUGHAL also reported upbeat sales in Q4 19 ahead of sales tax changes, explaining the sequential decline.
    • Gross margins improved significantly from 7.6% in the last quarter to 12.5% due to lower scrap prices and price increases in Jul’19. Note that MUGHAL recorded some low margin trading sales in Q4 19.
    • Finance cost rose by 2.5x yoy to PKR402mn, due to higher borrowings and interest rates.
    • Effective tax rate of 14%, due to income tax credits available under section 65E and adjustment of deferred tax. We assumed tax rate to come in at 22% for this quarter.

    We downgrade our recommendation to Neutral (from Buy) with an unchanged TP of PKR35/sh. We think positives like improving sales outlook and lower scrap prices have been incorporated in the share price as it is up by 31.3% FY 20td and is currently trading at FY 20f P/E of 8.5x. Sales are expected to gradually improve in the next quarter, but a normal effective tax rate for MUGHAL in the range of 20-25% might result in flat earnings.

    Risks: (i) Decline in rebar/girder prices due to competition, (ii) slowdown in demand and (iii) new capacities in the sector.