Mughal Iron & Steel Industries Limited

Mughal Iron & Steel Industries Limited (PSX: MUGHAL) was incorporated in Pakistan as a public limited company in 2010. The company is engaged in the manufacturing and sale of mild steel products relating to ferrous segment.

Pattern of shareholding

As of June 30, 2022, MUGHAL has a total of 335.633 million shares outstanding which are held by 6508 shareholders. Directors, CEO, their spouse and minor children are the major shareholders of the company with a stake of 43.2 percent. This is followed by associated companies, undertakings and related parties holding 32.16 percent shares of the company. Modarbas and Mutual funds account for 9.62 percent shares of MUGHAL followed by local general public holding 7.4 percent shares. Banks, DFIs and NBFIs have a 2.89 percent shareholding in MUGHAL. The remaining shares are held by other categories of shareholders each having a stake of less than 1 percent in the company.

Performance Trail (2018-22)

Except for a dip in 2020, the topline of MUGHAL has been growing by leaps and bounds in all the years under consideration. The bottomline also follows the same trajectory. In 2021, MUGHAL boasts the highest topline growth of 65 percent year-on-year which translated into a bottomline growth of 478 percent. The margins of the company which reached their lowest ebb in 2020 recovered in the subsequent years to max out in 2022.

In 2019, the topline of MUGHAL recorded a 39 percent year-on-year growth which came on the back of increased volumes as well as prices. The diversified product mix of the company allows it to cater to the needs of diversified segments of the market. However, it is to be noted that the export sales of the company witnessed a massive dip in 2019. The gross profit increased by 14 percent year-on-year, however, GP margin slide from 13 percent in 2018 to 10 percent in 2019 on the back of inflationary pressure and devaluation of Pak Rupee which rendered the raw materials expensive for the company. Selling and distribution expense dipped by 18 percent year-on-year on the back of lesser advertisement and sales promotion as well as low freight charges on account of curtailed export sales during the year. Admin expense posted a rise of 17 percent year-on-year on the back of increase in workforce as well as salaries. Other expenses also rose on the back of higher WWF and WPFF in line with higher profits while other income slid due to low income on financial assets. Operating profit grew by 17 percent year-on-year in 2019, however, OP margin dropped to 8 percent in 2019 from 10 percent in 2018. Another major blow to the bottomline was given by finance cost which expanded by 42 percent year-on-year due to significant increase in the discount rate coupled with a rise in outstanding borrowings. The healthy 39 percent year-on-year growth in topline could only translate into a 6 percent year-on-year rise in the bottomline which clocked in at Rs.1373 million in 2019 with an EPS of Rs.5.46 versus Rs.5.13 in 2018. NP margin stood at 4 percent in 2019 versus 6 percent in the previous year.

In 2020, the company witnessed a drop in sales volume as well as average sales rates owing to lock down period on the back of outspread of COVID-19. The topline nosedived by 11 percent year-on-year. While local sales still form the major portion of MUGHAL’s overall sales pie, it dropped during the year while export sales made major strides. The gross profit also dipped by 18 percent year-on-year with GP margin clocking in at 9.6 percent as the company couldn’t pass the increase in raw materials and energy prices to the customers on the back of tamed demand. Operating expenses were kept in check by limiting the advertising budget coupled with low outwards freight, handling and forwarding charges on the back of low sales volume. Low provision for WWF and WPFF resulted in a 57 percent year-on-year drop in other expense while other income posted a 96 percent year-on-year rise on the back of greater income from financial assets coupled with the gain on disposal of tangible fixed assets. Operating profit thinned down by 18 percent year-on-year in 2020 with OP margin clocking in at 7.6 percent. Finance cost posted a humungous increase of 93 percent year-on-year in 2020 due to high discount rate in the initial quarters of FY20 coupled with increased borrowings. One of the major factors that pushed up the finance cost was the foreign currency short-term borrowings during the year which resulted in exchange loss due to Pak Rupee devaluation. The bottomline posted a 57 percent year-on-year drop in 2020 to clock in at Rs.592.87 million. EPS stood at Rs.2.25 in 2020 while NP margin was recorded at 2 percent. 2021 showed the highest topline growth of 65 percent year-on-year which came on the back of stunning volume and price increase in both ferrous and non-ferrous segments. Both local and export sales witnessed amazing growth momentum. In the local economy, the growth came on the back of government uplifting construction activities by providing incentives. Increase in house financing also played a pivotal role in keeping the construction sector robust during the year. During the year, MUGHAL also initiated its bar re-rolling mill with a capacity of 430000 tons per annum which added to the topline growth. Gross profit also boasted a staggering 156 percent year-on-year growth in 2021 with GP margin clocking in at 15 percent, the highest ever level achieved by the company. Operating expenses posted a massive jump during the year due to increase in advertising and marketing activities, outward freight cost as well as salaries and wages. Other expense grew on the back of increase in WWF and WPPF in line with increase in profitability. Despite growth in expenses, operating profit grew by 167 percent year-on-year with OP margin standing at 12 percent which is also the highest ever achieved by the company. Finance cost slid by 10 percent year-on-year on the back of low discount rate and reduction in foreign exchange loss during the year. The bottomline grew by an enormous 478 percent during the year to clock in at Rs. 3429.15 million with an EPS of Rs.11.16. NP margin clocked in at 7.6 percent in 2021.

2022 brought a set of grave challenges for Pakistan’s economy as well the world’s economy. Locally, political and economic instability were rife which resulted in record high inflation and discount rate as well sharp devaluation of Pak Rupee. Internationally, high fuel and commodity prices on the back of Russia-Ukraine war shook the world economies and produced even profound impact on Pakistan, which with dwindling foreign exchange reserves was already not able to meet its financial obligations. Amidst all the challenges, MUGHAL could still post an incredible 47 percent year-on-year rise in topline on the back of superior performance in the 1HFY22. The 2HFY23 witnessed a sharp decline in demand. Overall, ferrous segment witnessed a drop in sales volume while the non-ferrous segment achieved an increase in off-take. The topline growth is mainly associated with price increase during the year. The gross profit improved by 51 percent on the back of effective inventory and logistics management, upward revision in pricing and Pak Rupee devaluation which made export sales dearer. GP margin also slightly improved to 15.3 percent in 2022. Operating expenses and other expenses grew during the year while other income behaved generously on the back of increase in commission against corporate guarantee, sales tax adjustment as well claim against material provided to the company. Operating profit rose by 65 percent year-on-year in 2022 with OP margin clocking in at 13 percent. Finance cost gave a blow to the bottomline as it grew by 91 percent year-on-year on account of unprecedented discount rate coupled with increased borrowings during the year. The bottomline grew by 58 percent year-on-year in 2022 to clock in at Rs. 5410.96 million with an EPS of Rs. 16.12. NP margin stood at 8.2 percent during the year.

Recent Performance (1HFY23)

The performance of MUGHAL was not promising in the 1HFY23. In absolute terms, the topline slid by a meager 3 percent year-on-year, however, there was a significant drop in volumes during the year – both local and export. Cost of sales, however, showed no respite due to increase in global commodity prices coupled with Pak Rupee depreciation. The gross profit thinned down by 41 percent year-on-year in 1HFY23 with GP margin clocking in at 11 percent versus 18 percent in 1HFY22. Operating expenses remained in check and allowance for expected credit loss was also reversed by Rs. 48.042 million. Other income couldn’t lend any helping hand as it dropped by 54 percent in 1HFY23. Operating profit shrank by 41 percent year-on-year in 1HFY23 with an OP margin of 9 percent versus 16 percent during the same period last year. Finance cost made the things even worse as it multiplied by 91 percent year-on-year on account of high discount rate. The bottomline contracted by 62 percent year-on-year to Rs.1342.57 million in 1HFY23. EPS also slimmed down to Rs.4 in 1HFY23 versus Rs.10.52 in 1HFY22. NP margin clocked in at 4 percent during the period under review vis-à-vis 11 percent in 1HFY22.

Future Outlook

Pak Rupee devaluation, commodity price hike, increase in electricity surcharge, high discount rate and curtailed imports will continue to take a toll on the performance of MUGHAL. The expected spur in post-flood construction activities may provide growth impetus; however, it is also contingent on whether the company has enough inventories to meet the demand. Only time will tell how the company stays afloat in the brewing economic and political storms.