Mughal Iron & Steel Industries Ltd

AKD Securities Limited

We initiate coverage on Mughal Iron and Steel Industries Limited (MUGHAL) with a target price of PKR179/sh, offering upside of 56% from last close. Our bullish stance on the stock is based upon rebar capacity expansion to 430k tons from 150k tons (expected to come online in 1QFY22) where MUGHAL is perfectly positioned to play robust construction demand cycle triggered by recently concluded amnesty scheme and Govt.’s flagship project of Naya Pakistan Housing Scheme (total industry rebar volume is expected to register a 3y CAGR of 7.25%). Moreover, MUGHAL will capitalize on increased copper demand and prices, taking earnings contribution from non-ferrous segment to 43% on avg. for next 3 years. Further, capacity ex-pansion of billet (current capacity meets 77% of total re-rolling requirement) amid sufficient power available (40MW in excess even after assuming 100% utilization of expanded rebar capacity) will also drive earnings growth. MUGHAL is currently trading at PEG of 0.2x vs. ASTL’s PEG of 0.45x with earnings of the company expected to register a 3yr CAGR of 28% between FY21-24.

MUGHAL in a perfect spot to capitalize on construction demand: Local long steel manufactur-ers are direct beneficiaries of improving economic activity after the Govt. placed the onus of economic growth on the construction sector. Impact is already visible with derived steel demand increasing by 19%YoY for FY21—highest in a decade. Additional uplift is expected to arrive from initiation of work on government’s flagship project of Naya Pakistan Housing Scheme while pro-gress on hydropower projects/dams will further bolster the demand. Based on the aforemen-tioned factors, we expect local long steel demand to stage a CAGR of 7.25% for FY21-24F. MUGHAL, situated in demand hub i.e. Northern region, is expected to be a prime beneficiary of the construction boom as already indicated by 40%YoY increase in topline for 9MFY21 while moving forward, we except company’s sales volumes to grow with a CAGR of 14.1% for FY21-24F as upcoming rebar expansion is expected to take MUGHAL’s rebar market share to 3.5% by FY24 against 2.5% currently. Strong impetus to growth is provided by the rebar capacity expan-sion which is due to come online in 1QFY22 which would take company’s total capacity to 430K tons from ~150k tons previously.

Surging Copper prices - amplifying Mughal earnings: China, one of the biggest importers of copper products, is ramping up its copper inventories amid expectation of strong infrastructure demand in the medium run. While ongoing trade issues with Australia, political uncertainty in Peru & Chile and supply crunch globally has caused copper prices to ascend to over US$10k/ton (+46% since Jul’20) in international markets, providing Pakistani exporters opportunity to in-crease their share in Chinese imports after revised FTA categorized it as a zero-rated product. Escalating copper prices provide impetus to Mughal’s earnings after it ventured into exports of copper ingots by establishing a non-ferrous segment, to not only diversify its product portfolio but also to amplify its margins (gross margin for non-ferrous segment stood at 26.8% for 9MFY21 against 12.6% for ferrous segment). Moving forward, company is expected to record 42.8% avg. earnings contribution from non-ferrous segment over FY21-24F.

Investment perspective: MUGHAL’s earnings are expected to register a 3y CAGR of 28% with rebar/girder sales expected to grow by 3yr CAGR of 20%/6% for FY21-FY24F, taking capacity utilization to 75.3% by FY25. The stock is currently trading at FY22 P/E of 5.15x and a PEG of 0.2x vs. 0.45x of ASTL. We have a buy stance on the stock with FY22 TP of PkR179/sh. Upside trigger to stock performance comes from production woes finally settle-in with Mughal being granted grid load of 79.9MW from LESCO, taking company’s electricity load capacity to ~102.68MW against expected requirement of ~63MW, even after assuming 100% re-rolling capacity utiliza-tion. Currently, company carries a rerolling nameplate capacity of 630k tons against billet capaci-ty of ~400k tons, resulting in a shortfall of 230k tons. However, recently company has an-nounced a plan to add 3 melting furnaces where we believe, i) excess energy availability, ii) healthy cash flow profile with cash flow from operation averaging at PkR5.3bn for FY21-24, and iii) D/E of 70% for next 3 years provides us comfort that company can easily finance the recently announced additions. Clarity on the exact capacity of new furnaces and CAPEX is awaited, how-ever we have incorporated addition of three melting furnaces, having capacity of 50k tons each, in each of next three years.

Find AKD research on Bloomberg, firstcall.com, Reuters Knowledge and ResearchPool

REP-019

September 13, 2021

Mughal Iron & Steel Industries Ltd

Shahrukh Saleem, CFA Senior Investment Analyst [email protected]

Grooving to the construction beat

BUY

Mughal: Valuation Glance

Source: Company Report & AKD Research

TARGET PRICE (PkR) SHARE PRICE (PkR)

179.0 114.8

UPSIDE/DOWNSIDE DIV. YIELD

55.9% 7.8%

FY20 FY21E FY22F FY23F

EPS (PkR) 2.4 12.6 22.4 25.0

DPS (PkR) - 5.0 9.0 10.0

BVPS (PkR) 32.4 55 68 83

P/E(x) 43.0 9.2 5.2 4.6

P/BV(x) .3.12 2.1 1.69 1.38

Div.Yield - 4.4% 7.8% 8.7%

Earn. Growth -11% 60% 58% 6%

ROA 2% 11% 15% 16%

ROE 8% 30% 36% 33%

Mohsin Ali Investment Analyst [email protected] +92-111-253-111 (646)

Source: PSX & AKD Research

MUGHAL vs KSE100 Index

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AKD RESEARCH

Table of contents About the company 04 Onus of economic growth on construction sector – MUGHAL perfectly placed in this backdrop! 05 Commodities bull driving scrap prices to a multi – year high 08 Copper prices rallying on stimulus driven packages 09 Investment Perspective 11 MUGHAL – Earnings to remain solid in 4QFY21 13 MUGHAL - Annual Financial Data Bank 14 MUGHAL - Quarterly Financial Data Bank 15

Mughal Iron and Steel Industries Limited (MUGHAL) is the prominent long steel manufacturer in northern part of the country, with a reported nameplate re-rolling/billet capacity of 446K/343K tons (as of FY20). It has been operating in the industry since 1950s under the name of MUGHAL Traders. In 2010, Mughal Steel changed its name to Mughal Steel & Iron Industries Ltd to continue its legacy as the prominent steel player in the country. The Company produces wide range of products in the ferrous segment (billet, rebar, girder and T-Iron) and in non-ferrous segment (copper ingots and previously different alloys). Steel rebars cater to both housing sector and large infrastructure projects, while girders and t-iron mainly cater to the rural housing. Highly diversified product mix shields the company from different risks ema-nating from any single segment. Yet, rebar still remains the crown jewel of the company in terms of core business. Ferrous and non-ferrous segments contribute 75%/25% sales of the company. In terms of ownership, it largely rests with the Directors, CEO and Children 69% and general public 10%.

Expansion plans: The company’s rebar capacity expansion, slated to come online in 1QFY22, should take rebar capacity to 430K tons from 150K tons previously, increasing MUGHAL’s ability to capture pent-up demand. Furthermore, recent debottlenecking of girder mill also helped the company to expand its Girder plant capacity to 200K tons per annum from 150k tons. In addition to the rerolled capacity enhancement, Mughal is expected to add more melting furnaces to its operation along with capacity enhancement in non-ferrous segment in coming years.

AKD RESEARCH

About the company


Share holding pattern (FY20)

Directors69%

Local10%

Foreign

Co

1.0%

Imported Scrap Semi—finished product: Billet

Finished products: Rebar,girder and T-Iron

Transportation End Consumers: Housing sector (urban and rural)

and large institutions

MUGHAL Process Flow

2003

Mughal Steel (a partnership concern) was established

along with “Mughal Trust”

20052006

MISIL installed a coal gasification plant in 2011 and further in 2013 installed a new tandem section

mill with annual capacity of 300,000 MT. Tandem Section

Mills is a novel approach to re-rolling industry in Pakistan

2010

20112013

Stainless Steel Sheet Rolling Mill was added to the previ-

ously established Mughal Steel. The new production unit resulted in increased product line and efficiency

The BoDs elected to change the name of the company from

Mughal Steel to Mughal Iron & Steel Industries Limited (MISIL). In the same year MISIL installed bar

re-rolling mill with capacity of 150,000 M/T.

Foreseeing the rising demand of electricity, “Mughal steel” imported and installed a 9.3 MW captive power plant in collaboration with GE Jen-

bacher. It was the first to go for captive power generation

1998

1999

Mughal Steel began a new era in Pakistan steel making by importing and establishing 2 Induction

Furnaces.

Source: Company Report

The first corporate as well as the mini section mills

were commissioned under the name of Mugh-

al Sons (Pvt) limited

19831984

Procurement and installation of six (06) engines (gas fired electric generators)

having gross generation capacity of 3.1 MW each along with ancillary equipment and

Balancing, Modernization and Replacement (BMR) of existing bar re-rolling mill

2017

2020 2021

Mughal Steel ventured into exports of copper ingots by

establishing non-ferrous seg-ment and completion of BMR

of girder re-rolling mill and rebar rolling mill.

Millstones achieved

*(Non-listed) -

excluding PSM

AKD RESEARCH

Onus of economic growth on construction sector – MUGHAL perfectly placed in this backdrop! Long steel manufacturers recorded volumetric growth of 57% in the previous boom cycle of FY14-18 aided by CPEC-led demand and the government imposing anti-dumping duty on im-ports from China. While CPEC provided immediate boost to consumption, second round im-pact fizzled out as economic fundamentals weakened, leaving these players with excess capac-ities (avg. utilization dropped to 54% in FY19-20 vs. 71% in FY18) and price pressures. MUGHAL with lower capacity enhancements and power constraints performed better to wither down cycle (GMs in the past two years avg. at 9.97%, no change in capacity) than its southern coun-terpart ASTL (GMs in the past two years avg. at 7.96%, capacity enhanced to 600k tons from 250k tons in FY18). However, this time around, demand is domestic-led with impetus coming from Govt. in terms of policy support like construction package, launch of low cost housing schemes and SBP setting construction-related financing targets for banks. This should bring more robustness to demand outlook for these players, stretched across med-to-long run. MUGHAL by virtue of its positioning in the North is expected to be a significant beneficiary of demand uptick as it faces lower competition compared to Southern region while lower prices in North also mitigate influx from South (PkR3-5K/ton price differential, historically). Though, currently due to supply crunch and rampant demand prices are at the same level (PkR177-179K/ton).

Rebar demand to register a FY21-24F CAGR of 7.25%: We evaluate sector’s demand outlook by drawing comparison between rebar demand growth and GDP where historical numbers suggest former’s growth to be 1.4x of GDP growth. Taking IMF’s projections of FY22/23/24 of 4.0%/4.5%/5.0% as our base case, we expect rebar demand to record a FY21-24 CAGR of 7.24%. We find this growth plausible on the basis of, i) avg. growth of 8% since FY15 taken as recurring over our investment horizon, ii) Govt.’s flagship housing projects which is likely to face sterner completion timeline with election nearing in CY23 - the Govt. has identified 1000 acres of Land for low cost housing schemes along with PKR33bn subsidy for FY22 vs PKR30bn for FY21, assum-ing 20% is materialized in the medium run would be enough to generate 63K tons of demand over the next three years, and iii) private sector projects with ~PkR493bn worth of projects reg-istered with FBR and the banking sector is expected to lend approx. PkR287bn over the period of three years, cumulatively generating ~0.47mn ton demand during the period.


Rebar — plant capacities (’000 tons) Industry gross profits rebounding in FY21

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Mughal - (GP) ASTL - (GP)

AGHA - (GP) ITTEFAQ - (GP)

Average Industry GMs - RHS

GDP growth likely to be at 5% for FY22 Federal PSDP expenditure

Source: Budget FY22, Economic Survey & AKD Research

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PSDP (PkRbn) PSDP as a % of GDP

*Others , 1,520 ,

37%

Capacities coming

online in FY22, 870

, 21%

Amreli, 600 , 15%

Mughal, 430 , 10%

Dost, 350 , 8%

Agha, 250 , 6%

Ittefaq, 120 ,

3%

AKD RESEARCH

Moreover, housing sector is expected to contribute 1.4mn tons (assuming 675k apartments are to be built) to additional demand, taking total industry utilization to 70-80% in FY22 (assuming expected expansions come online). Meanwhile, the Govt. has already initiated work on Diamer Basha Dam and an agreement has been inked for the construction of Azad Pattan Hydropower Project, which management of long steel players believe will generate ~3.5-4.5mn tons over the investment horizon; steel consumption ratio to cement is higher for dams (1/5 tons as compared to 1/8 tons for housing).

….

….MUGHAL in prime spot to capture this demand: MUGHAL through its presence in North – the epicenter of future demand spurt – is in a prime position to capture the current demand cycle. Moreover, the company’s rebar capacity expansion, slated to come online in 1QFY22, should take rebar capacity to 430K tons from 150K tons previously, increasing MUGHAL’s ability to capture pent-up demand. To highlight, total rebar demand in North accounted for ~84% of total country’s demand in FY21. We expect the company to face lower competition in near to medium run from South as, i) historical negative price differential (PkR176.5-177.5k/ton in North vs. PkR177.5-179.5k/ton in South), and ii) additional transportation costs of ~PkR3000-4000/ton excluding storage costs for South based players, reduces attractiveness of the northern market for southern players in the long run.

Further, influx of ungraded rebar could be neutralized by MUGHAL in the near term given, i) partial closure of Gadani shipbreaking which has taken a hit due to raw material supply-side issues and environmental concerns, ii) lower margins for Iranian rebar importers which are cur-rently being sold in South for ~PkR135-140k/ton (also less preferred in Govt. and high-rise pro-jects). However, in the medium run based on our correspondence with market players, around 15% of total scrap supply will be available from Gadani which is expected post normalization of ship breaking activity as COVID disruption eases globally which could pull down prices marginally and hence turn north based market feasible for ungraded rebar players. However, low current price differential (PkR6-8k/ton vs. PkR20-25k/ton previously) will help in mitigating the excess supply impact for MUGHAL. Consequently, we have assumed MUGHAL to capture 5.9% share in overall demand similar to FY17-18 in the short run, eventually normalizing to 6.2% in the medi-um run. Once the new capacity comes online, we expect rebar/girders sales to grow by 3yr CAGR of 20%/6% in FY21-FY24F, taking company’s utilization levels to 75.3% by FY25. Girder

Avg. household size per population: regional comparison Cement demand vs. Rebar demand

Source: United Nations, Department of Economic and Social Affairs, APCMA & AKD Research

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Total Population (mn) - LHS

Average household size (number of members)

Sales mix of Mughal for FY22F Sales growth for MUGHAL and ASTL


Rebar 47%

Girder27%

Non-ferrous 26%

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Cement sales - Tonnes (LHS) Rebar - demand (LHS)

Mughal Rebar sold - RHS

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Mughal - Net sales (mn) (LHS) ASTL - Net sales (mn) (LHS)

GMs of Mughal (RHS) GMs of ASTL (RHS)

AKD RESEARCH

share in sales mix has increased (44% in 9MFY21 vs 39% in FY19-20) amid improving farmer economics while our 3yr CAGR of 6% for FY21-24 will remain intact as south based players (ASTL and AGHA) are not in girder market whereas the other north based listed player ITTEFAQ has 120K tpa rerolling capacity which produces both rebar and girder, staging minimal competition for MUGHAL to capitalize on pent-up girder demand in rural areas. To note, recent debottle-necking of girder mill with associated capex of PkR620mn took total girder capacity to 200K tons, a significant increase given less fragmented nature of girder segment as opposed to rebar segment.

Prominent long steel players in the country — Location wise


KARACHI Amreli Faizan

AGHA Razzaq

Naveena Abbas

FAISALABAD

Ittehad

PESHAWAR FF

Dera Ismail Khan

AL mioz

LAHORE Mughal Kamran Steel

Ittefaq Dost

FF Beco

ISLAMABAD

Ittehad

HSEZ Pak Steel

AKD RESEARCH

Commodities bull driving scrap prices to a multi – year high International scrap prices made 7 year high in FY21: International scrap prices have increased by 7/90.5% CYTD/FY21 to currently hover around at US$450/mt compared to CY20 avg. of US$287/mt as global demand recovers with economic activity picking up while supply remains restricted. Additional stimulus to scrap prices has been provided by strong rebar demand in China leading the country to lift restrictions on import of scrap after local Chinese scrap prices made multi year highs. To note, China’s import of ferrous scrap in 5MCY21 totaled to 221.4k tons, up by staggering 29x against 5MCY20. Moreover, Removal of 13% VAT rebate on steel exports and import duties on raw materials of steel also indicate China’s plan to continue its massive development. Moving forward, we expect medium term demand for scrap to remain upbeat as repair work in flood affected areas both in China and Europe and stupendous US$1trn infrastructure budget passed by US senate could put upward pressure on scrap prices while decarbonization campaign in both China and Europe will continue to provide further fuel (carbon emissions from Blast Furnace are higher compared to EAF). To note, we have incorpo-rated average scrap prices of US$435/375/ton for FY22/23 against US$360/ton average for FY21.

Local long steel manufacturers have enjoyed stellar increase in demand on the back of various incentives being provided in the construction sector package where higher allocation of Federal PSDP of PkR900bn up 42.9%YoY for FY22 will provide further impetus to an already robust de-mand. To note, derived steel demand increased by 19%YoY in FY21 and is slated to grow by 10% in FY22. Consequently, local players were able to manage increase in input costs (scrap prices up by 90.5% in FY21) through swift pass on (local rebar prices up by PKR38-42K/ton or up by 38% in FY21). Our estimates suggest current rebar prices of PKR177-179K/ton reflect scrap prices of US$535-540/ton — assuming margins to sustain at 4QFY21 levels and PkR/USD of 164. However, scrap prices usually take effect with a lag of 45-60 days hence the impact of decreasing scrap prices will take effect later. We see positive ramification (through potential inventory gains in medium run) for local long steel manufacturers (ASTL, MUGHAL, AGHA, ITTEFAQ) where every US$5 drop in annual avg. scrap prices has a positive impact of PkR0.9/sh and PkR1.0/sh on ASTL and MUGHAL respectively (assuming no change in rebar prices).

Global scrap and rebar prices at multi — year high

Source: Bloomberg & AKD Research

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Scrap Price ($US/ton) Rebar Price ($US/ton) Avg Scrap Price - last 5 yr


Scrap prices hit 7 year high in May’21

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Scrap Price (US$/ton) Avg.Price - last 5 yr

Pakistan scrap imports and price performance

Source: SBP, Bloomberg & AKD Research

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Iron and Steel Scrap (PKRbn) Scrap Price (US$/ton) - RHS

Source: AKD Research

Scrap Price sensitivity with no pass on

EPS (PKR)

Scrap Price (US$/ton) FY22F FY23F

Base case US$435/t US$375/t

(-) 20US$/ton 16.88 19.12

(-) 10US$/ton 14.74 16.58

Base case 12.59 14.03

(+) 10US$/ton 10.44 11.49

(+) 20US$/ton 8.29 8.94

AKD RESEARCH

Chinese players driving copper prices to a 10 year high: International copper prices have touched a 10 year high of US$10.7K/ton on the back of strong demand from China, while addi-tional fuel was provided by supply side disruptions resulting from ongoing trade spat between China and Australia, with mines in Peru and Chile also facing issues. Moreover, changes in scrap purity rules have resulted in China’s copper scrap imports down 37.1%YoY in 2020, pulling up demand for refined copper. To highlight, China is by far the largest importer of copper products, recording 19.0%YoY growth in 2020 (in 7M CYTD, copper imports have surged by 50.8%YoY vs. avg. growth of 6% in the past 5 years). This came amid sustained domestic demand over the years, pulling up China’s share in total imports to 44.2% in 2020 after remaining around 27-28% since 2010. The latest consumption spree in China is buoyed by infrastructure-heavy stimulus to pull the economy from COVID-driven recession and clean energy drive as the country builds metals-intensive renewable energy and electric vehicle infrastructure.

China’s dependence on infrastructure spending to spur growth is not the first time in the recent past, as similar approach was witnessed in financial crises of 2008 when China’s import of cop-per jumped from US$26.0bn in 2008 to US$54.2bn in 2011. At that time prices went from US$4.86K/ton low in 2009 to a high of US$10.05K/ton. The primary difference, and rather bullish one, between this and the last crises is the broken or damaged supply chains. As such, we be-lieve that the latest price euphoria in copper is likely to extend in short to medium run until global supply chains integrate with demand, though long term outlook looks uncertain where i) China reducing/normalizing its import given adequate reserves buildup, ii) buzz regarding green energy and decarbonization campaign fizzle out and iii) transformation to Electric vehicles (EV) from combustion engine cars takes a halt.

Copper Imports: Chinese Vs World

Source: Comtrade & AKD Research

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14%

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26%

32%

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44%

50%

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Chinese imports (US$mn) - LHS World imports (US$mn) China's share in world imports

Chinese copper imports and price performance

Source: Comtrade, Bloomberg & AKD Research

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Chinese imports (US$mn) - LHS Copper Price (US$/ton) - RHS


Copper prices made 10 year high in FY21

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Copper Price (US$/ton) Avg.Price - last 5 yr

Copper prices rallying on stimulus driven packages

AKD RESEARCH

Surging copper prices amplifying Mughal earnings: Escalating copper prices have brought fruits for MUGHAL, who ventured into the exports of copper ingots by establishing a non-ferrous seg-ment. The purpose was to not only diversify its product portfolio but to amplify its margins as well (FY21-24F GM on non-ferrous segment expected at 20.3%), where the company is poised to record 42.8% avg. contribution in earnings from non-ferrous segment over FY21-24F. Mughal’s competitive advantage in long steel comes from its first mover advantage and robust copper demand globally, which bodes well in the medium run for its copper segment. In 9MFY21, Mughal reported gross margin of 26.8% from non-ferrous segment by exporting ~4-4.5K tons of copper ingots. Company’s raw material composition comprises of two different scraps i) com-pressor scrap, and ii) motor cycle scrap. The yield, however, varies across different types of scrap. In our estimates, we have assumed a yield of 8% for copper extraction in a ratio of 12.5:1 and assumed copper exports of 8k tons at US$9000/ton while scrap procurement is assumed at US$720/ton in FY22. We expect sales of non-ferrous segment to register a 3yr CAGR of 24% between FY21-24F. On the global front, copper prices have soared 46% since Jul’20 (amid soar-ing demand), driving profitability in the copper segment. In terms of capacity, Mughal has a nameplate capacity of ~10K-10.5K tons, while not incorporated into our estimates, upside to our forecast could come from potential expansion of copper ingots capacity which we believe could be in the range of ~5-8K tons.

Pakistan copper exports and price performance

Source: SBP, Bloomberg & AKD Research

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Pakistan copper exports (PKRmn) Copper Price (US$/ton) - RHS

Source: AKD Research

Copper price sensitivity

EPS (PKR)

Copper Price (US$/ton) FY22F FY23F

Base case US$9000/t US$8700/t

(-) 1000US$/ton 3.00 3.09

(-) 500US$/ton 6.41 7.02

Base case 9.81 10.95

(+) 500US$/ton 13.21 14.88

(+) 1000US$/ton 16.61 18.81

AKD RESEARCH

MUGHAL’s earnings are expected to register a 3y CAGR of 28% with rebar/girder sales ex-pected to grow by 3yr CAGR of 20%/6% for FY21-FY24F, taking capacity utilization to 75.3% by FY25. The stock is currently trading at FY22 P/E of 5.15x and a PEG of 0.2x vs. 0.45x of ASTL. We have a buy stance on the stock with FY22 TP of PkR179/sh. Upside trigger to stock perfor-mance comes from production woes finally settle-in with Mughal being granted grid load of 79.9MW from LESCO, taking company’s electricity load capacity to ~102.68MW against ex-pected requirement of ~63MW, even after assuming 100% re-rolling capacity utilization. Cur-rently, company carries a rerolling nameplate capacity of 630k tons against billet capacity of ~400k tons, resulting in a shortfall of 230k tons. However, recently company has announced a plan to add 3 melting furnaces where we believe, i) excess energy availability, ii) healthy cash flow profile with cash flow from operation averaging at PkR5.3bn for FY21-24, and iii) D/E of 70% for next 3 years provides us comfort that company can easily finance the recently an-nounced additions. Clarity on the exact capacity of new furnaces and CAPEX is awaited, how-ever we have incorporated addition of three melting furnaces, having capacity of 50k tons each, in each of next three years.

Electricity constraints fade away, making way for billet expansion: Company’s production woes have finally settled with MUGHAL being granted grid load of 79.9MW from LESCO, taking company’s full electricity load capacity to ~102.7MW. Lower energy supplies had previously pushed the company to source billet externally as well as shutting down furnaces in order to reduce operational losses. With the change of fate, a 100% capacity utilization at an expanded rebar capacity of 430k tons would yield energy requirement to total at 63MW, leaving enough capacity for billet expansion in the medium run. Currently, company carries a rerolling name-plate capacity of 630k tons against billet capacity of ~400k tons, resulting in a shortfall of 230k tons. However, recently company has announced a plan to add 3 melting furnaces where we believe, i) excess energy availability, ii) healthy cash flow profile with cash flow from operation averaging at PkR5.3bn for FY21-24, and iii) D/E of 70% for next 3 years provides us comfort that company can easily finance the recently announced additions. Clarity on the exact capacity of new furnaces and CAPEX is awaited, however we have incorporated addition of three melting furnaces, having capacity of 50k tons each, in each of next three years.

Valuation on diluted number of shares: We have valued Mughal on the basis on FCFF method, coming up with a TP of PkR179/sh, implying an upside of 56% at last close. Our conviction on the scrip stems from healthy gross and net margins of 15%/10% with EBITDA/cash flow from operations generation of PKR11.7bn/PKR6.2bn on average over our investment horizon. Debt to asset for Mughal is projected to stay below 0.3x vs. an average of 0.5x over last 7 years, re-affirming our stance for potential expansion of melting capacity to reduce dependence on exter-nally procured billets and further expansion in the non-ferrous segments.


Mughal Utilization to increase in FY22-25

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Valuation Matrix


FY22F FY23F FY24F FY25F FY26F FY27F

Net Profit 6,537 7,291 7,772 8,544 9,187 9,257

Depr & Amort 472 514 557 579 602 626

Working Capital (6,583) 834 (1,464) (1,587) (2,907) (2,776)

Operating Cash Flows 426 8,639 6,865 7,537 6,882 7,107

Capex (1,418) (1,475) (1,534) (795) (827) (860)

Interest expense 1,578 1,506 1,333 1,230 1,196 1,089

FCFF 585 8,670 6,664 7,972 7,251 7,336

PV of FCFF 585 7,652 5,191 5,480 4,399 3,928

Terminal Value - - - - - 73,310

PV of Terminal Value 44,477 - - - - -

Total PV of FCFF 71,711 - - - - -

Net Debt (19,571) - - - - -

PV of Equity 52,140 - - - - -

TP (PkR) 179 - - - -

Investment Perspective

Valuation Metrics

Terminal Growth 3.0%

Adjusted - Beta 1.27

RfR 8.5%

Market risk premium 6.0%

CAPM 16.1%

AKD RESEARCH

Risk to investment thesis: Key near term risk to our investment thesis is the expiry of Anti-Dumping Duty (ADD) in Jun’22. To recall, Pakistan imposed ADD of 19.15/24.05% on rebar/billet in 2017, the expiry of which could increase Chinese rebar imports and decrease price differen-tials between MUGHAL’s retail price and imported rebar prices where regulatory duty/custom duty of 30%/5% are partially effective in protecting domestic players. Upside potential to our investment case can emanate from (i) higher than expected offtakes (rebar, girders and ingots), (ii) extension in amnesty scheme, and (iii) potential increase in melting capacity. On the flip side, downside risks could emerge in the form of: (i) unexpected upsurge in scrap prices, (ii) global rally in copper prices taking a halt, and (iii) removal of duties on imported rebars and PKR deprecation

MUGHAL’s stock performance: Ever since the government announced amnesty scheme for construction sector, MUGHAL has been one of the front runners with the stock performing 54.4% since Dec’20 against 6.2% for KSE-100, an outperformance of 48.2%. Moving forward, a number of triggers are expected to materialize as increase in billet capacity reaps dividends while upcoming increase in rebar capacity will further propel the earnings. After financing 80% of its expansion through equity by the way of right issue, MUGHAL will enjoy a tax break on the portion of the project financed by equity, contributing PKR2.6/sh to earnings for FY22-26. In-creasing copper prices will also provide support with earnings from the segment to grow with a CAGR of 16% for FY21-24. With the overall earnings growth of 28% for FY21-24 and PEG of 0.18x, we expect the stock to continue performing with our TP of PkR179/sh providing an upside of 56%

Source: PSX & AKD Research

MUGHAL vs KSE100 Index

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AKD RESEARCH

MUGHAL – Earnings to remain solid in 4QFY21 MUGHAL is slated to announce its 4QFY21 result (20th Sep'21), where we expect the company to record a profit of PkR1.18bn (EPS: PkR4.06) vs NPAT of PkR197mn (EPS: PkR0.68) in 4QFY20. This will take FY21 NPAT to PkR3.7bn (EPS: PkR12.66) on the back of sturdy offtakes +16%YoY against NPAT of PkR593mn (EPS: PkR2.03) in FY20. The expected earnings for the quarter pri-marily emanate from 1.24xYoY/30%QoQ growth in the topline largely on account of higher vol-umes and higher prices (+29%YoY/13%QoQ). Gross margins to clock in at 15.6% compared to 21.2% in 3QFY21 because of soaring scrap prices (+14%QoQ) and failure to pass on cost com-pletely (rebar prices +9%QoQ) while copper prices upsurge (+16%QoQ) are expected to provide respite to the margins. For FY21, the swing in profitability comes on the back of robust growth in topline +60%YoY amid massive jump in offtakes +16%YoY with gross margins clocking in at 15.7% in FY21 vs 9.6/10.3% in FY20/19 while a drop of 8%YoY in finance cost will also help in amplifying bottom line. Moreover, we expect MUGHAL to announce a final dividend of PKR2.0/sh for the year after company has already paid PKR3.0/sh as interim dividend, taking the total payout for FY21 to PKR5/sh. However, due to supply side disruptions and higher freight cost (+US$40-50/ton to US$80-100/ton vs historical avg. of US$30-40/ton), we cant rule out the pos-sibility of company announcing a bonus as opposed to a cash payout.

4QFY21 3QFY21 QoQ% FY21E YoY%

Net Sales 13,480 10,372 30.0% 43,649 60%

COGS (11,382) (8,176) 39.2% (36,816) 49%

Gross Profit 2,098 2,196 -4.5% 6,833 261%

GM% 15.6% 21.2% -26.5% 15.7% n.a

NPAT 1,184 1,110 6.6% 3,694 523%

EPS 4.1 3.8 6.6% 12.7 523%

DPS 2.0 - n.a 5.0 n.a

MUGHAL: Income Statement


AKD RESEARCH

MUGHAL - Annual Financial Data Bank

(Year End June-30) FY19 FY20 FY21E FY22F FY23F

EPS 4.70 2.03 12.65 22.40 24.98

Earnings Growth 6.4% -56.8% 523.1% 77.0% 11.5%

BVPS 29.8 32.4 54.9 68.4 83.4

PER 21.2 49.0 9.1 5.2 4.6

P/BVS(x) 3.9 3.6 2.1 1.7 1.4

Topline Growth 38.7% -11.4% 59.9% 58.4% 6.5%

Gross Margin 10.3% 9.6% 15.7% 15.0% 15.3%

Net Profit Margin 4.5% 2.2% 8.5% 9.5% 9.9%

EBITDA Margins 9.0% 8.2% 14.5% 14.3% 14.4%

ROA 6.8% 2.5% 11.1% 15.0% 15.6%

ROE 18.3% 7.6% 30.5% 36.3% 32.9%

Dividend Yield 1.0% 0.0% 4.4% 7.8% 8.7%

DPS 1.2 - 5.1 9.0 10.0

Income Statement

(PkRmn) FY19 FY20 FY21E FY22F FY23F

Net Sales 30,828 27,305 43,649 69,145 73,632

Gross Profit 3,189 2,618 6,833 10,403 11,267

Operating profit 2,621 2,067 6,039 9,383 10,124

Other Income – Net 30 59 80 100 125

EBITDA 2,772 2,249 6,317 9,856 10,637

Profit Before Tax 1,737 554 4,329 7,332 8,151

Net Profit - Total 1,373 593 3,694 6,537 7,291

Balance Sheet


Current Assets 14,013 15,640 26,769 30,969 31,152

Long Term Assets 8,628 9,966 14,343 15,288 16,249

Total Assets 22,641 25,606 41,112 46,258 47,401

Current Liabilities 11,356 14,009 18,243 20,849 19,000

Non-Current Liabilities 3,781 3,439 6,829 5,447 4,065

Total Liabilities 15,137 17,449 25,072 26,296 23,065

Total Equity 7,504 8,158 16,039 19,961 24,336

Cash Flow


CF from Operations 846 (947) (4,394) 426 8,639

CF from Investing (2,233) (1,697) (3,034) (1,418) (1,475)

CF from Financing 3,337 1,819 9,538 (3,097) (6,299)

Net Change in Cash 1,951 (825) 2,109 (4,089) 865

Opening Cash 1,251 3,202 2,377 4,486 397

Ending cash 3,201 2,377 4,486 397 1,262


Valuation Multiples KATS Code MUGHAL

Bloomberg Code MUGHAL.PA

Price PkR 114.8

Market Cap (PkRmn) 33,505.0

Market Cap (US$mn) 202.33

Shares (mn) 291.86

Free Float Shares (mn) 72.96

3MHigh(PkR) 117.33

3MLow(PkR) 99.27

1YrHigh(PkR) 119.75

1YrLow(PkR) 60.62

3MAvgTurnover'000 431.8

1YrAvgTurnover'000 1,218.90

3MAvgDTValue(PkR'000) 47,522.97

3MAvgDTValue(US$'000) 286.97

1YrAvgDTValue(PkR'000) 103,236.78

1YrAvgDTValue(US$'000) 623.41

AKD RESEARCH

MUGHAL - Quarterly Financial Data Bank


Valuation Multiples

Year End (Jun-30) 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21

EPS (PkR) 0.11 0.66 1.21 3.58 3.80

EPS growth -67.5% 481.5% 82.5% 196.8% 6.1%

PER (x) 1,008.6 173.5 95.1 32.0 30.2

ROE 0.4% 2.4% 3.5% 8.3% 7.6%

ROA 0.1% 0.8% 1.1% 3.0% 2.6%

BVS (PkR) 28.1 28.0 34.9 42.9 50.0

P/BVS (x) 4.1 4.1 3.3 2.7 2.3

CFS (PkR) (4.6) (4.0) (8.8) (8.7) (21.0)

P/CFS (x) (25.2) (28.9) (13.1) (13.2) (5.5)

Gross Margin 8.8% 10.5% 11.2% 14.8% 21.2%

Operating Margin 6.7% 8.2% 9.3% 13.4% 18.3%

Net Margin 0.5% 3.2% 4.6% 8.9% 10.7%

Effective tax rate 339.4% 14.3% 13.2% 14.3% 14.9%

Income Statement

(PkRmn) 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21

Net Sales 7,218 6,008 7,734 11,711 10,372

COGS 6,583 5,379 6,872 9,976 8,176

Gross Profit 635 630 862 1,735 2,196

Operating Exp 153 137 146 164 300

Operating Profit 482 492 717 1,571 1,896

Other Income 7 26 31 37 -8

Other Charges -1 27 30 91 231

Financial Charges 505 267 312 297 354

NPBT -14 225 406 1,221 1,304

Taxation -47 32 53 175 194

NPAT 33 193 352 1,046 1,110

Balance Sheet

(PkRmn) 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21

Long Term Assets 9,357 9,966 13,322 15,076 15,294

Current Assets 13,432 15,640 19,516 19,716 26,799

Total Assets 22,789 25,606 32,838 34,792 42,093

Long Term Liabilities 3,215 3,439 4,445 4,785 7,833

Current Liabilities 11,368 14,009 18,210 17,478 19,678

Total Liabilities 14,583 17,449 22,656 22,263 27,510

Share Holders' Equity 8,206 8,158 10,183 12,528 14,583

Total Liabilities & Equity 22,789 25,606 32,838 34,792 42,093

Cash flow Statement

( PkRmn) 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21

CF from operations (1,328) (1,161) (2,561) (2,547) (6,125)

CF from investing activities (851) (1,470) (501) (546) (831)

CF from financing activities (276) 1,908 2,457 2,298 8,659

Net chg. In cash & equiv. (2,455) (722) (605) (794) 1,703

Opening Cash 3,062 3,062 2,340 2,340 2,340

Ending cash 607 2,340 1,735 1,546 4,043

AKD RESEARCH

AKD Securities Limited 602, Continental Trade Centre,

Clifton Block 8, Karachi, Pakistan. [email protected]

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Mughal Iron & Steel Industries Ltd

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