Karachi, April 27, 2023 (PPI-OT): Long Steel: MUGHAL and ASTL 3QFY23 result previews

We present 3QFY23 earnings expectations for Mughal Iron and Steel Ltd. (MUGHAL) and Amreli Steels Limited (ASTL), where we expect improvement in earnings primarily over better retention prices.

We forecast 3QFY23 EPS at Rs6.5 for MUGHAL (+161% YoY/+366% QoQ) whereas ASTL is expected to post EPS of Rs1.7 for the quarter versus an EPS of Rs2.0 in 3QFY22 and a loss of Rs1.3/share in 2QFY23. We do not expect any dividend alongside the quarter results.

The scarcity of raw materials due to restrictions on the establishment of LCs has led to a noticeable increase in steel rebar prices by manufacturers (CY23TD +Rs68,000/ton, +30%). We believe pressure on steel companies' profitability would continue during the coming months due to continued steep PKR depreciation and rising scrap prices.

3QFY23 profitability to improve

We present 3QFY23 earnings expectations for the two major listed rebar players where we expect MUGHAL to report a noticeable jump in earnings both on a YoY basis and sequentially whereas for ASTL, we expect a decline on YoY basis however a sequential rise in profitability. The long steel sector is expected to continue to report lower demand due to general slow-down in construction activities. Whereas the sector is also likely to face higher cost of raw materials and higher finance costs (due to increase in interest rates). Rise in margins at the gross level is mainly expected due to the significant price increments made during the period.

MUGHAL: Profitability to improve over better prices

The Board of MUGHAL is scheduled to meet on 28th April, 2023 to discuss 3QFY23 results. We expect the company to post 3QFY23 EPS at Rs6.5, +161% /+366% on a YoY/QoQ basis. Gross margins are expected to clock in at 24% over better pricing for both the ferrous and non-ferrous divisions. Similarly, operating margins are expected to clock in at 22%, 16ppt higher QoQ. Finance cost is however expected to be higher due to rise in KIBOR.

Consequently, we expect net margins of the company to also increase by 11ppt to ~14% on a sequential basis. Despite better profitability, we do not expect any dividend announcement alongside the results given the sector’s tough situation.

ASTL: Margins to improve this quarter

Amreli Steels (ASTL) is scheduled to meet on 27th April, 2023 to discuss 3QFY23 financial results where we expect the company to post an EPS of Rs1.7 for the third quarter, versus an LPS of Rs1.3 for 2QFY23. We expect gross margins to clock in at 21% (+15ppt QoQ) due to higher retention prices. Similarly, company’s performance is also expected to improve on a sequential basis at the operating level with operating margins clocking in at 17% (up 14ppt 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.

Rebar manufacturers to 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. Additionally, from their most recent low of US$339/ton in Nov-2022, scrap prices have increased by 35%. Steel rebar producers have been raising prices since the beginning of this year, and have raised prices by roughly Rs68,000/ton (a net 30% CYTD increase), out of concern that there will be a severe scarcity of raw materials due to restrictions on the establishment of LCs. Some steel companies have also suffered losses due to demurrage costs on containers carrying steel scrap. Whereas widespread smuggling of steel from Iran and Afghanistan is also adding to the problems of 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 favour, with import restrictions adding to woes.