Karachi, August 25, 2023 (PPI-OT): Long Steel: MUGHAL and ASTL 4QFY23 result previews

We present 4QFY23 earnings expectations for Mughal Iron and Steel Ltd. (MUGHAL) and Amreli Steels Limited (ASTL), where we expect sequential decline in earnings primarily over higher financial and tax charge.

We forecast 4QFY23 EPS at Rs1.8 for MUGHAL (-42% YoY/-54% QoQ) whereas ASTL is expected to post LPS of Rs0.6 for the quarter versus an EPS of Rs1.6 in 3QFY23 and a loss of Rs1.7/share in SPLY. We do not expect any dividend alongside the final quarter results.

We believe pressure on steel companies' profitability would continue during the coming months due to continued steep PKR depreciation, further expected hikes in energy tariffs, and dull demand from the construction sector.

4QFY23 profitability to take a hit

We present 4QFY23 earnings expectations for the two major listed rebar players where we expect MUGHAL and ASTL to report a noticeable dip in earnings both on a YoY basis and sequentially. The long steel sector continued to report lower demand due to general slow-down in construction activities during the outgoing quarter. Sequential decline in margins, in comparison to March, is expected for the June quarter, largely due to the absence of inventory gains observed in the latter. Companies will also face higher tax charges and finance costs (due to increase in interest rates) during 4QFY23.

MUGHAL: EPS to decline over higher finance and tax charge

MUGHAL is expected to post 4QFY23 EPS at Rs1.8, -42% /-54% on a YoY/QoQ basis. Gross margins are expected to clock in at 16% over lack of inventory gains during 4QFY23. We believe ferrous division is expected to post volumes below last quarter whereas non-ferrous division volumes would be similar to previous quarter. Operating margins are expected to clock in at 14%, 3ppt lower QoQ.

Finance cost is expected to be higher due to rise in KIBOR. Higher finance cost, and the retrospective Super tax charge take our earnings projections down 54% QoQ. Consequently, we expect net margins to also decrease by 3.7ppt to ~4% on a sequential basis. We do not expect any dividend announcement alongside results given relatively weaker cashflow situation.

ASTL: Loss expected for the quarter

We expect ASTL to post an LPS of Rs0.6 for the 4QFY23, similar to last quarter of FY22 where it posted an LPS of Rs1.7. We expect gross margins to clock in at 15% (-3ppt QoQ) due to absence of inventory gains similar to 3Q. Similarly, company’s performance is also expected to drop on a sequential basis at the operating level with operating margins clocking in at 11.3% (down 3ppt QoQ). On the other hand, Finance cost is expected to be higher for ASTL as well on a QoQ basis due to increase in KIBOR rates during the period. For ASTL as well, we do not expect any dividend announcement alongside the results given weaker cashflow situation.

Rebar manufacturers remain under stress

The continued steep depreciation of the PKR versus the US$ is a major issue since steel scrap accounts for over 60% of a rebar manufacturer's manufacturing costs. Steel rebar producers have been raising prices since the beginning of this fiscal year, and have raised prices by roughly Rs17,000/ton (6% increase), in response to rising electricity tariffs and rupee devaluation. Companies are still worried of a scarcity of raw materials due to some impediments in the establishment of LCs. Whereas widespread smuggling of steel from Iran and Afghanistan also remains a problem for north based graded rebar manufacturers.

In light of the above, we believe pressure on steel companies’ profitability is expected to continue in the months to come. We reiterate our view that dull demand and lower margins may take time for the sector to find favor. Return to normalcy on the demand front would be an upside trigger.