Mughal Iron & Steel Industries in the light of its financial results for 1QFY21

Mughal Iron & Steel Industries Limited (MUGHAL) conducted its corporate briefing session on 20th Nov 2020 to discuss the key outcomes of 1QFY21. To recall, the company posted a PAT of PKR 352 Mn (EPS: PKR 1.4), compared to PKR 264mn (EPS: PKR 1.05) in Q1FY20.

Key Takeaways

The management highlighted that the steel industry of Pakistan has a total capacity of 5Mn Ton per annum (50% Graded and 50% Ungraded). The Naya Pakistan Housing Scheme with subsidy of PKR 30Bn has the potential to increase demand by 6-7Mn tons.

Further, the per capita steel consumption of Pakistan stands at 19.1kg. Comparing this with the regional and global averages at 262Kg and 238kg, reflects the potential demand of the sector.

As a heavily guarded industry, the government has placed several duties on international imports to protect the industry ranging from 26-50%.

The management touted its performance during the Covid 19 pandemic in FY 20. The actual FY 20 sales at PKR ~30.9Bn (27.3Bn + 3.6Bn Sales tax) were slightly above FY 19 at PKR 3.8Bn. The sales figure reported in FY20 annual report excluded sales tax of PKR 3.6Bn while the same was included in FY 19 numbers.

The sector wise sales mix is 18% and 82% between the corporate and retail sector respectively. Over the years, the company increased the share of the retail sector in the total sales mix to avoid higher working capital holdup and potential debt provision in case of customer financial position deterioration.

The Rebars sales mix constitute of 32% of the sales coming from G60 bars while 68% from Supreme bars. The G60 bars are used for large project for infrastructure building while supreme is used for smaller scale projects in urban and rural areas.

The major products sold to the retail sector include Supreme rebars, Girder and Tee making up 47%, 50% and 2% of the total demand.

The management also stated that the girder demand is more prevalent in rural areas while rebar’s demand is mainly driven from urban areas. MUGHAL is the only large steel player catering to the Girder market.

The company has started manufacturing Copper ingots (non-ferrous). These are majorly exported to China with prices pegged to the London metal exchange at around ~6% discount. The company forecasts this segment to clock in PKR 5Bn of sales.

Commenting on the plant expansion by competitor, the company does not view it as a major threat in the north region as most of players are in the south region. Presently, Mughal regional sales mix is 85-80% in the north while 15-20% in the south.

The major raw material used by the company for rebar is shredded scrap. As international scrap prices have increased in 4MFY21, MUGHAL increased its products price by PKR 1,000 last week, with the current price at around PKR 117,000-114,000/ton.

Commenting on the new BMR project, the management stated that the expansion will increase rebar capacity to 430Mn tons per annum and the plant will be able to handle larger finished product size resulting in economies of scale.

The company views future demand to come from CPEC and the five hydro dam projects. The company has already won a contract for three dams, estimating steel demand of 350,000 Tons from Bhasha and 250,000 Tons from Mohmand dam in the first phase.

BMA Capital Management Ltd.

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