We resume coverage on MUGHAL with a Buy rating based on June 2021 TP of PKR50.0/sh. We expect a decent pick-up in construction activity post FY20 and improved margins amid lower input costs. This drives our expectation of future earnings CAGR of 34% (albeit from a low base).
Recent dips in scrap and oil prices, coupled with significant cuts in interest rates, will aid in margin recovery going forward. The recent BMR of rerolling mill (with c. 200k-300k tpa of additional capacity) and installation of new furnaces – on top of presence in Punjab and the end of past power woes – are poised to help in capturing future demand.
MUGHAL compares well with peers due to (i) a diversified sales mix which has drawn stable margins, (ii) leverage to the construction up-cycle (low-income housing scheme, mega dam projects) and (iii) superior cash-flow position despite a high D/A ratio. Lower input costs in an interest rate down-cycle strengthen our outlook.
Well-positioned for future growth in construction…
We have a Buy stance on Mughal Iron & Steel (MUGHAL), which is well-positioned and has a diversified product mix to benefit from the pickup in construction activity in Pakistan – amid a recovering economy and driven by the recent government stimulus package. Our June 2021 TP is PKR50/sh. For future demand growth, we take cue from the previous construction up-cycle during FY15-19, when cement dispatches had a CAGR of c.9%, while MUGHAL’s revenue grew at an average 26%. Amid new demand from infrastructural projects (low-income housing scheme, resumption of construction of mega dams and CPEC projects), we expect a 3yr Volume CAGR of 14% post FY20. MUGHAL has the key advantage of operating in the North due to lower distribution expenses (efficient distribution network and lower transport costs); North accounts for c. 80% of total rebar demand.
…backed by a more diversified sales mix
MUGHAL has enjoyed stable margins in contrast to peers. Its diverse product mix, ranging from girders to rebars, has allowed it to effectively capitalize on changing market trends and demand outlook, where it had an earnings CAGR of 22% during FY15-19. The introduction of its affordable rebar variant, “Supreme”, in 2016 alongside girders (used in rural housing), has allowed MUGHAL to diversify its product mix and cater to a varying audience. MUGHAL has drawn about 75% of its sales in FY19 from the retail sector compared to c.54% in FY18, when it was more reliant on the corporate sector with its premium rebar ‘G60’. This equips MUGHAL with a unique flexibility (unlike ASTL) to tweak its sales mix according to the demand in future, in our view.
…and superior cash-flows vs. peers
MUGHAL has maintained a relatively strong cash-flow position relative to peers (despite having a high D/A ratio of c. 60%), allowing it to maintain sufficient liquidity for working capital injection and make timely repayments of debt, where peers have faced a severe liquidity crunch. This has allowed MUGHAL to hold up well relative to peers in the face of Covid-19 lockdowns.