Mughal Iron and Steel Industries

Mughal Iron and Steel Industries (PSX: MUGHAL) was established as a public limited company in 2010 under the repealed Companies Ordinance, 1984. It manufactures and sells mild steel products. Its manufacturing plant is located in Lahore.

Shareholding pattern

As at June 30, 2021, over 43 percent shares are held with the directors, CEO, their spouses and minor children, followed by 32 percent held in associated companies, undertakings and related parties. About 10 percent shares are held under modarabas and mutual funds while the local general public holds 7.4 percent shares. The remaining roughly 7 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has largely seen a growing topline except for when it contracted in FY17 and FY20.

In FY18, topline registered a growth of 18.2 percent to cross Rs 22 billion in value terms. During the year, Mughal Iron and Steel improved its grid station load from 19.99MW to 79.99MW, gas load from 2.80 MMCFD to 6.3 MMCFD. It also commissioned six gas engines for in-house electricity that will reduce raw material issues, in addition to resolving energy shortage, since installation of induction furnaces is part of the expansion plan. This will decrease reliance on outsourced, expensive billet.Moreover, with cost of production reducing to 87.4 percent of revenue, compared to over 89 percent in FY17, gross margin increased to 12.57 percent. However, increase in net margin was relatively curtailed at 5.8 percent due to finance expense increasing to consume 2.5 percent of revenue due to higher working capital requirements.

Revenue continued its growth momentum in FY19 as it increased by 38.7 percent reaching Rs 30.8 billion. This was attributed to an increase in sales volumes as well as price. However, this did not translate into higher profitability as cost of production increased to almost 90 percent of revenue. This was due to inflationary trend in the economy, in addition to currency devaluation that drove the prices of inputs upwards. Thus, net margin was recorded at a lower 4.4 percent.

Topline contracted in FY20 by 11.4 percent primarily due to the outbreak of Covid-19 pandemic that led to strict lockdowns and hence a halt in business operations. Due to suspended flights and minimal travel, foreign engineers could not travel to Pakistan which meant that the company had to postpone its re-bar re-rolling mill expansion. As a result, production cost increased to over 90 percent of revenue. With finance expense rising due to high interest rates and exchange loss, net margin shrunk to 2 percent,the lowest seen since FY12.

At nearly 65 percent, revenue witnessed the highest growth in FY21 seen in the last six years, with topline nearing Rs 45 billion. This was attributed to an increase in volumes as well as prices. Demand was encouraged by government’s focus towards the construction industry, increase in housing finance, etc. With production cost falling to an all-time low of 85 percent, gross margin peaked at almost 15 percent. This also trickled to the bottomline that grew to its highest of Rs 3.4 billion while net margin was also recorded at an all-time high of 7.6 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 81 percent year on year. This was attributed to an increase in both sales volumes as well as price. The latter was due to currency devaluation that also had a positive impact on gross margin that was recorded at a higher 19.6 percent compared to 11 percent in 1QFY21. This also trickled to the bottomline that also received support from other income. The latter was higher on the back of foreign exchange gain. Thus, net margin grew to 12 percent, versus 4.5 percent in the corresponding period last year.

The second quarter saw higher revenue as well year on year by over 54 percent. This was again attributed to an increase in volumes and prices. Increase in prices was attributed to an increase in price of raw materials and currency devaluation. Production cost reduced marginally to almost 84 percent that allowed gross margin to improve to 16.2 percent. This also reflected in the net margin that was higher at 10.2 percent compared to 8.9 percent in 2QFY21.

Revenue in the third quarter was higher by almost 46 percent year on year. Similar trend continued of rising prices and volumes, however, the increase in production cost to almost 88 percent of revenue, compared to almost 79 percent in 3QFY21, resulted in reduced net margin. The latter was recorded at 5.5 percent compared to 10.7 percent in 3QFY21. Demand is expected to increase on the back of increase in construction activities, dams, house financing, etc. However, rising commodity prices can threaten future profitability, particularly if the burden cannot be passed on to the market.