Karachi, February 06, 2023 (PPI-OT): Long Steel: MUGHAL and ASTL 2QFY23 result previews

We present 2QFY23 earnings expectations for Mughal Iron and Steel Ltd. (MUGHAL) and Amreli Steels Limited (ASTL), where we expect decline in gross margins over lower volumetric sales.

We forecast 2QFY23 EPS at Rs1.9 for MUGHAL (-27% QoQ) whereas ASTL is expected to post LPS of Rs0.7 for the quarter versus an EPS of Rs0.7 in 1QFY23. 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 +Rs78,000/ton, +35%). We believe pressure on steel companies’ profitability would continue during the remainder of FY23 due to continued steep PKR depreciation and rising scrap prices.

2QFY23 profitability to decline

We present 2QFY23 earnings expectations for MUGHAL and ASTL where we expect the sector to report a decline in earnings both on a YoY basis and sequentially. The long steel sector is expected to report lower demand due to general slow-down in construction activities amid winter season. Whereas the sector will also face higher cost of raw materials and higher finance costs (due to increase in interest rates). Normalization of margins at the gross level is a key reason for expected deterioration in sequential profitability.

MUGHAL: Non-ferrous’ profitability to provide some support

MUGHAL is expected to post 2QFY23 EPS at Rs1.9, -65% /-27% on a YoY/QoQ basis. We expect gross margins to clock in at 14% over lower volumetric sales for both the ferrous and non-ferrous divisions. Similarly, operating margins are expected to clock in at 12%, 1ppt lower QoQ, whereas finance cost is expected to be higher (~+20% QoQ) due to rise in KIBOR resulting in lower profits before tax.

Consequently, even with a lower expected effective tax rate of 12%, we expect net margins of the company to drop by 2ppt to ~4% on a sequential basis. The company has a history of paying half yearly dividends, we however do not expect any dividend announcement alongside the half yearly results given the sector’s tough situation.

ASTL: Margins to normalize this quarter

We expect ASTL to post an LPS of Rs0.7 for the second quarter, versus an EPS of Rs0.7 for 1QFY23. To recall, the company had shut down its plant due to the dull demand scenario during 1QFY23 and had sold from available inventory. We expect gross margins to clock in at 11% (-5ppt QoQ) due to higher expected discounts. Company’s performance is also expected to drop on a sequential basis at the operating level with operating margins clocking in at 8% (down 4ppt QoQ). Finance cost of the company is expected to be higher by 14% on a QoQ basis due to increase in KIBOR rates.

Sector to remain under pressure during 2HFY23

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 22%. Steel rebar producers have been raising prices since the beginning of this year, and have raised prices by roughly Rs78,000/ton (+35% CYTD), 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.

In light of the above, we believe pressure on steel companies’ profitability is expected to continue during the remainder of FY23. 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.