Karachi, January 28, 2022 (PPI-OT): MUGHAL: Better gross performance to lift 2QFY22 earnings

We present earnings estimates for MUGHAL ahead of the 2QFY22 result announcements We expect the company to post earnings of Rs1.9bn translating into an EPS of Rs5.7 for the quarter taking half year EPS to Rs10.7, up 2.2x mainly led by inventory gains due to efficient inventory management during the period.

Gross margins for the quarter are anticipated to post a 3.2ppt increase on a YoY basis as higher sale prices offset the impact of elevated scrap costs.

Going forward, we believe rebar prices would be stable; however, prices could likely face a downward pressure if scrap prices ease in the latter half of FY23.

Stable margins due to inventory gains

We preview MUGHAL’s profitability for 2FY22 where we expect the company to post earnings of Rs1.9bn translating into an EPS of Rs5.7 for the quarter taking half year EPS to Rs10.7, up 2.6x mainly led by inventory gains due to efficient inventory management during the period. During the quarter, top-line is expected to expand by 1.7x YoY over higher selling prices and sales volume for both the ferrous and non-ferrous segments. Due to effective management of scrap inventory, we expect the company to report margins of 18% (up by 3.2ppts YoY) on the gross level. According to our projection the company had two months of inventory available for December quarter. We expect the company’s financial charges to rise on a sequential basis due to higher effective cost of debt during the quarter. We don’t expect any dividend along with the first half results.

Upcoming expansion projects and power arrangements

MUGHAL has recently announced to install a melting plant and feedstock processing unit with an estimated CAPEX of Rs2.9bn which will increase the capacity of its non-ferrous segment leading to higher exports. The project is expected to achieve CoD by 3QFY23. The incremental capacity is expected to add Rs9/share to the earnings in the first year of operations. Company is also evaluating the feasibility of other non-ferrous businesses alongside Copper and Aluminium.

We believe the Achilles’ heel for the steel manufacturer, i.e. electricity outages have remained a key risk for MUGHAL in achieving scale in the past. The situation has now improved due to recent arrangements. The company has 9 captive gas fired plants with a cumulative gross capacity of ~27MW. MUGHAL also now has a LESCO connection for a load up to 90MW.

The company’s associate, MUGHAL Energy Limited, is in the process of installing a 36.50MW hybrid power plant which will cover most of the electricity needs for MUGHAL’s core business, we await further details on the arrangement and thus haven’t incorporated it in our model. The plant is expected to improve the overall capacity utilization due to better electric supply.