Earnings Report /
Pakistan

Mughal Iron & Steel Industries: Q3 FY 20 preview – Sequential improvement in earnings

  • MUGHAL is expected to post Q3 FY 20 NPAT of PKR130mn (EPS: PKR0.52), down 64% yoy but up 27%qoq

  • GM is expected to come in at 9.1%, compared to 6.9% in Q2 FY 20 on account of higher prices

  • Finance cost (up 68% yoy) is expected to remain high due to increasing leverage on MUGHAL’s books

Intermarket Securities
29 April 2020

MUGHAL is expected to post 3QFY20 NPAT of PKR130mn (EPS: PKR0.52), compared to NPAT of PKR362mn (EPS: PKR1.44) in SPLY, down 64% yoy but up 27%qoq. It is expected to take cumulative 9MFY20 NPAT to PKR497mn (EPS: PKR 1.97), compared to a NPAT of PKR1,075mn (EPS: PKR4.27) last year. 

Key expectations:

  • Revenue is expected to rise to PKR7,477mn, up 9%/1% (yoy/qoq), on account of higher realized prices. Constraints on the supply side due to suspended operations pushed the prices further up towards the end of 3QFY20.
  • We expect volumetric sales to have remained flat during the quarter due to the general slowdown in construction activities and ceased operations since late March. However, we believe its impact was countered by higher rebar prices during 3QFY20, resulting in revenue growth.
  • Gross margins for 3QFY20 are expected to clock in at 9.1%, compared to 6.9% in 2QFY20. However, margins are expected lower from 11.9% in SPLY. Sequential improvement can be accredited to better pricing, coupled with a stable PKR/USD rate and lower scrap prices for greater part of 3QFY20. 
  • Finance cost (up 68%yoy) is expected to remain high due to increasing leverage on MUGHAL’s books. Excessive short term borrowing to meet liquidity needs and manage cash flow position has kept the earnings in check. We believe that the impact of interest rate cuts in March will be fully realized during 4QFY20, providing a much needed breather.

Electricity constraints in the past have kept output and margins suppressed for MUGHAL, relative to peers. We believe that recent drop in oil prices alongside lower scrap prices will play out well for the company to mitigate its input costs. However, we expect sales to remain restrained during 4QFY20 in the backdrop of current economic slowdown. Gradual recovery may be observed from FY 21 onwards, once uncertainty encompassing the pandemic subsides.