CONTENTS:
1. BUSINESS OF THE COMPANY:
Mughal Iron & Steel Industries Limited (“Mughal Steel”) was incorporated in 2010 as a public limited company. The Company took over the running business of a partnership concern by the name of “Mughal Steel” which had been in the steel business for over 50 years and was being run by the major sponsors of the Company. Today, the Company is one of the leading steel companies in Pakistan.
2. PRODUCTS:
The Company is involved in multidimensional activities from making billets to steel rebars, girders and copper ingots.
The Company’s main product range comprises of the
following products:
- Steel re-bars (G60 / Mughal Supreme)
- Girders
- Billets
- Copper ingots
3. MARKETS:
The main markets of the Company are domestic housing sector market both in urban and rural areas, large infrastructure projects market and international market for copper ingots.
Steel rebars cater to both housing sector market and large infrastructure projects market, while girders mainly cater the housing sector market.
The housing sector market for steel rebars comprises mainly of housing sector in the urban areas, whereas the housing sector market for girders mainly comprises of housing sector in the rural areas.
The large infrastructure projects market on the other hand comprises of demand from different projects initiated by various private sector, public sector, and semi-government institutions.
4. KEY STRENGTHS:(Positive)
- In-House Power and Gas Generation:
The Company has installed a gas-fired captive power plant and also has a dedicated 132 KVA grid station, having energized load capacity of 79.99 MW.
- Housing Schemes by Govt.
- Brand Recognition
- Strong Clientele / Distribution Network
- Technological Efficiencies
- Backward Integration
- Diversified Product and Market Portfolio
- Cost Effective Inbound Logistics
- One Stop Sale Centers for Long Rolled Steel Products
5. RISK FACTORS:
i. Low Margins High Cost of Doing Business:(Negative right now)
Steel is a partially local and import dependent business since Pakistan imports the major raw materials of production, majorly from China. The industry is subject to exchange rate volatility and international price behaviors. Currency depreciation by approx. ~4% in 9MFY20 had directly impacted the gross margins of the industry.
ii. Import Substitution-Little Protection to the Industry:(Negative right now)
Following FY18, some protection was provided to the domestic Industry through imposition of anti-dumping duties on certain Chinese and Ukrainian suppliers for a period of five years. However, this measure was not sufficient to curb the disparity of dumped import items and local production. Recently, in the out turn of an investigation conducted by the National Tariff Commission (NTC) (March’20), further anti-dumping duties are levied on imports from Canada and Russia as well, in addition to the duties already in place.
iii. Finance Costs:(Negative right now)
Steel Industry has high working capital needs, therefore is largely dependent on external sources of funding. Increase in cost of borrowings adversely impacts the performance of the players.
iv. Demand Volatility:(positive right now)
Although steel is an essential sector for economic growth, its offtake is largely dependent on infrastructural spending and automobile sector performance. Any downside to these bears a direct impact on the Steel offtakes.
v. Increase in Fixed Cost:(Negative right now)
Fixed cost mainly consists of Financial Charges, Marketing expenses, and other overheads. If SBP discount rate goes up, rupee devaluation occurs and increase in inflation happens than net profitability of the company will be affected and will have negative effect on the EPS which results into fall in share prices. If the said factors happen on the positive sides than share price will improve.
vi. Change in Govt. Policies:(Ambiguous right now)
Any change in government policies related to steel sector may affect the share price of the Company. If policy change is positive than share price will increase, otherwise vice versa. The Government is promoting construction in the country which is positive for Steel industry but as the same time we see increased import duties to curb the trade deficit which negatively affects the industry.
6.PAKISTAN PROFILE
We should always consider the macro economics of the Country before investing in a particular sector. The Markets are not isolated from external Events and factors especially those sectors which are highly dependent on costs of raw materials like Steel and Fertilizer Industry.
i. Oil Prices
The Chart shows the relation between Oil Prices with KSE100 and Mughal share price. The chart does not show any significant relation of Oil Prices with the Company’s share price.
ii. Inflation Rates
The Chart shows the relation between Inflation Rates with KSE100. The Inflation rates are always inversely proportional to the Stock market returns. Right now, we are having a rise in Inflation rates and further increase in Interest rates is anticipated due to Twin deficit and increasing Commodities prices. The recent Russia-Ukraine war is playing critical role in this regard.
Considering all these factors it is likely that stock market will not be performing well in near future until the global economics and factors change.
iii. Interest Rates
The Chart Below shows the relation between Interest Rates with KSE100. The interest rates are always inversely proportional to the Stock market returns. Right now, we are having a rise in interest rates and further increase in Interest rates is anticipated due to Twin deficit and increasing Commodities prices. The recent Russia-Ukraine war is playing critical role in this regard.
Considering all these factors it is likely that stock market will not be performing well in near future until the global economics and factors change.
iv. Twin Deficit
The Fiscal Deficit and Current account Deficit play an important role in financial health of any country. Pakistan is struggling to minimize its twin Deficit and Government is trying to implement Export friendly policies. Since Steel industry is Import based Sector therefore, we are not anticipating the sector’s good performance in near future.
v. Currency Devaluation
The Pakistani Currency is in a constant pressure of Devaluation from Decades. The devaluation has accelerated rapidly for 4 years making it difficult for import-based sectors like Steel industry to perform well.
7. FUNDAMENTAL ANALYSIS
The Growth Factors have some good and bad. The Revenue Increase (CAGR) have been good with Operating Profit and EPS doing well. However, Cash flows are having low scores since Steel Industry has high working capital needs.
Looking at the Stability Ratios, we can see the margins are increasing towards good category except FY2020 due to COVID. The last year have been better with margins as well.
The Current ratio, Debt to Equity ratio have been in pretty good category. However, the company have raised some debt.
Except increasing debt, we see positive figures in major indicators. The robust recovery from Covid wave is also due to Government policies favoring Construction Sector.
Horizontal Analysis of Statement of Profit or Loss shows that despite surge in Sales the Company is struggling to increase its Profits. This is due to increasing cost of raw materials and high operating cost in industry.
Since Steel Industry is a high Capital-intensive Industry therefore the expenses are rising with rise of sales.
Cash & Cash Equivalents, Inventories and Accounts Receivables show Robust Growth.
The Asset accumulation is increasing on regular basis. But Current Ratio is stagnant for a very long period.
The company has started bearing increased Debts and Liabilities despite Growth in Revenue and sales. However, the Current Ratio Neutralizes the Figures.
The Stocks have performed well recently with increased retained earnings.
The Company is getting cash from financing instead of Operations. Moreover, Free Cash flow have been declining aggressively which indicates declining business health.
Inventory Turnover Ratio has been declining for past three (3) years
The Directors’ & Executive Remuneration has increased recently.
8. VALUATION & FREE CASH FLOWS
The Company is getting cash from financing instead of Operations. Moreover, Free Cash flow have been declining aggressively which indicates declining business health.
The cashflows shows that company is highly in-debt and making profits by financing activities.
The Free cash flows are very bad. We have Bad debts to consider as well.
9. FINANCIAL STRENGTH
The Financial Strength is in Average range. Interest Coverage & Cash to Debt Ratio are also in bad category. We need to be cautious of Debts.
10.Intrinsic value
The intrinsic values show the Stock have a value of 214.80 against 103.67 price which has Excellent margin of safety.
11. Dupont analysis
The DuPont Analysis show good signs as ROE have been increasing except Covid year. Net Profit margin are getting better with time. However, Asset Turnover & Return on Equity has not recovered from the Covid hit.
12. Business analysis
Despite Increase in Sales & production in Last year and Construction friendly policies by government the company’s production is almost half of its capacity. Which is not a good sign.
Mughal VS Industry
The company is not beating the various business growth indicators of Industry except sales.
Conversion of Sales Growth into Profit:
The company have been making sales consistently except in covid. It has been able to convert sales into Profits. The Company is not generating Cashflow from operation and still making Profits due to Debt Financing.
Conversion of Sales Cash into Profit:
The Company is not generating Cashflow from operation and still making Profits due to Debt Financing. As the Price fell in last year, it has bad value for shareholder.
13. MANAGEMENT ANALYSIS
Dividends
The company has reduced the shareholding to 43.15% showing Managements’ lack of Confidence. However Mutual funds have increased shareholding to 10.41%. the Price fell in last year, it has bad value for shareholder.
14. SCORING
Although MUGHAL has recovered from Covid in TTM. But It is not that ideal for an Investor from scoring perspective.
PEER COMPARISON
Results show holding from 2015 can have 12.22% per annum performance which is below average.
15.SUMMARY:
ADVANTAGES:
Mughal seems to be a pretty good company with most robust recovery from covid as compared to industry peers.
You can notice the share price have not fell that much as of 09 MAR 2022 as compared to peers.
DISADVANTAGES:
The company is affected from PKR depreciation and interest rates and Exports favoring policies.
The company is in a lot of
As major Raw materials i.e., Iron ore, Iron scrap and coal prices are rising and inflation increasing, the pricing have been in a hurdle therefore there is likelihood of downtrend for a short term (although the company is strong, we might not see a sudden fall).
AUTHOR:
This article is prepared by Mr. Daniyal Khan, He is a student of recently launched training from sarmaaya platform, i-e 'Fundamentals of Capital Market' which is organized and host by Ammar Yaseen.
