Earnings Report /
Pakistan

Mughal Iron & Steel Industries: Q4 FY 19 results: Bumper sales led to earnings beat

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    20 September 2019

    Mughal Steels (MUGHAL) posted 4QFY19 NPAT of PKR298mn (EPS: PKR1.19), down 13%yoy/18%qoq, taking FY19 earnings to PKR1,373mn (EPS: PKR5.46), up 6%yoy. The result was higher than our EPS estimate of PKR0.85, due to a record quarterly sales and lower opex. MUGHAL also announced a final dividend of PKR1.2/sh, higher than our expectation of PKR1.0/sh.

    Key highlights for 4QFY19 include: 

    • Topline of PKR9.8bn, up by 76%yoy/44%qoq due to increased capacity. We also suspect pre-emptive buying in the quarter to avoid a higher sales tax effective from Jul’19. Note that its peer Amreli Steels (ASTL) also recorded its highest quarterly revenue of PKR9.8bn, up 54%qoq, in 4QFY19.
    • Gross margins of 7.6%, declined by a sharp 4.3ppts, potentially due to continuous PKR depreciation. However, we await management guidance to understand such a severe sequential decline.
    • Distribution expenses was only PKR28mn, down 52%yoy, despite sales growth. This number is unusually low and may have resulted due to year-end adjustments.

    Despite FY19 being a tough year, MUGHAL posted a yoy 6% increase in NPAT on the back of higher revenues. Decline in gross margins is attributed to PKR depreciation and higher power cost where pricing power was mostly limited during the year. 

    We have a Jun-20 TP of PKR33/sh for MUGHAL which implies a Buy stance. Sales of the company have remained impressive throughout the year while gross margins may also stabilize due to price increases from Jul’19. In addition, scrap prices are on the downtrend (down 16% during FY20TD) which should benefit the company.

    Risks: (i) Decline in rebar/girder prices due to competition, (ii) slowdown in demand and (iii) entry of new players.