Mughal Iron & Steel – a result review

MUGHAL has posted a NPAT of PKR1.7bn (EPS: PKR5.03) for 1QFY22, up a sharp c.85% qoq and c.4.8x yoy (distorted due to Covid-19 lockdowns). The 1Q result has come in much higher than our projected EPS of PKR2.86, where the variance has emanated from substantially higher-than-expected gross margins.

Key takeaways from 1QFY22 result:

Revenue has clocked in at PKR14bn, down 7% qoq (up c.80% yoy distorted due to Covid). It is lower than our expectation of PKR16bn, likely due to lower ferrous segment sales (non-ferrous segment sales are broadly in line), in our view.

MUGHAL has posted gross margins of c.19.6%, up c.7ppt qoq, significantly higher than our expectation of 12%. This is attributed to the improvement in both long steel and copper segment margins. We highlight that the non-ferrous segment margins clocked in at c.35%, while ferrous segment margins clocked in at c.14% for the quarter (as per accounts).

Distribution costs rose by a sharp c.30% qoq (albeit from a low base) to PKR55mn from PKR42mn, due to a rise in local freight charges amid rising fuel costs and advertising charges. Other expenses have decreased by c.80% qoq (higher WWF charges).

Finance cost has clocked in at PKR446mn, up c.10% qoq; this is likely due to an increase in short-term debt. Additionally, effective tax rate for the quarter was c.16%, compared with c.25% in the previous quarter.

The result has come in much higher than our expectations, mostly due to marked improvement in gross margins in both ferrous and non-ferrous segments. Copper segment margins are likely to remain healthy in the coming quarter amid elevated copper prices, while long steel margins may gradually normalize amid moderating inventory gains, in our view. However the demand for long steel may dwindle in light of continued price hikes and slowdown in private sector led demand. But, an uptick in government spending is likely to keep long steel volumes healthy in FY22, while enhanced copper flows will positively contribute to the bottomline. We have a Buy stance on MUGHAL with a June 2022 TP of PKR123.0/sh.

Courtesy – Intermarket Securities Limited.

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