Mughal Iron & Steel Industries Ltd

September 13, 2021

REP-019
Mohsin Ali
Investment Analyst Grooving to the construction beat
[email protected]
+92-111-253-111 (646) We initiate coverage on Mughal Iron and Steel Industries Limited (MUGHAL) with a target
Shahrukh Saleem, CFA price of PKR179/sh, offering upside of 56% from last close. Our bullish stance on the stock is
Senior Investment Analyst based upon rebar capacity expansion to 430k tons from 150k tons (expected to come online in
[email protected] 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%).
BUY
Moreover, MUGHAL will capitalize on increased copper demand and prices, taking earnings
TARGET PRICE (PkR) SHARE PRICE (PkR) contribution from non-ferrous segment to 43% on avg. for next 3 years. Further, capacity ex-
179.0 114.8 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
UPSIDE/DOWNSIDE DIV. YIELD
capacity) will also drive earnings growth. MUGHAL is currently trading at PEG of 0.2x vs.
55.9% 7.8% 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
Mughal: Valuation Glance increasing by 19%YoY for FY21—highest in a decade. Additional uplift is expected to arrive from
FY20 FY21E FY22F FY23F initiation of work on government’s flagship project of Naya Pakistan Housing Scheme while pro-
EPS (PkR) 2.4 12.6 22.4 25.0 gress on hydropower projects/dams will further bolster the demand. Based on the aforemen-
DPS (PkR) - 5.0 9.0 10.0 tioned factors, we expect local long steel demand to stage a CAGR of 7.25% for FY21-24F.
BVPS (PkR) 32.4 55 68 83 MUGHAL, situated in demand hub i.e. Northern region, is expected to be a prime beneficiary of
P/E(x) 43.0 9.2 5.2 4.6 the construction boom as already indicated by 40%YoY increase in topline for 9MFY21 while
P/BV(x) .3.12 2.1 1.69 1.38 moving forward, we except company’s sales volumes to grow with a CAGR of 14.1% for FY21-
Div.Yield - 4.4% 7.8% 8.7% 24F as upcoming rebar expansion is expected to take MUGHAL’s rebar market share to 3.5% by
Earn. Growth -11% 60% 58% 6%
FY24 against 2.5% currently. Strong impetus to growth is provided by the rebar capacity expan-
ROA 2% 11% 15% 16%
sion which is due to come online in 1QFY22 which would take company’s total capacity to 430K
ROE 8% 30% 36% 33%
tons from ~150k tons previously.
Source: Company Report & AKD Research
Surging Copper prices - amplifying Mughal earnings: China, one of the biggest importers of
MUGHAL vs KSE100 Index 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
80% Peru & Chile and supply crunch globally has caused copper prices to ascend to over US$10k/ton
70% (+46% since Jul’20) in international markets, providing Pakistani exporters opportunity to in-
60%
crease their share in Chinese imports after revised FTA categorized it as a zero-rated product.
50%
40%
Escalating copper prices provide impetus to Mughal’s earnings after it ventured into exports of
30% copper ingots by establishing a non-ferrous segment, to not only diversify its product portfolio
20% but also to amplify its margins (gross margin for non-ferrous segment stood at 26.8% for
10% 9MFY21 against 12.6% for ferrous segment). Moving forward, company is expected to record
0%
-10%
42.8% avg. earnings contribution from non-ferrous segment over FY21-24F.
-20% Investment perspective: MUGHAL’s earnings are expected to register a 3y CAGR of 28% with
Jan-21

Mar-21
Apr-21
May-21
Jun-21
Jul-21
Oct-20

Feb-21
Sep-20

Nov-20
Dec-20

Aug-21
Sep-21

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
MUGHAL KSE-100 Index
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
Source: PSX & AKD Research 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-
AKD Securities Limited 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

 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
 AKD RESEARCH

About the company

Share holding pattern (FY20)
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

Foreign Co 1.0%
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
Local
10% 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-
Directors
69%
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,
Source: Company Report & AKD Research
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.

MUGHAL Process Flow

Imported Scrap Semi—finished Finished products: End Consumers: Housing

Transportation sector (urban and rural)
product: Billet Rebar,girder and T-Iron
and large institutions

Millstones achieved
Stainless Steel Sheet Rolling Foreseeing the rising demand Procurement and installation of six (06)
Mill was added to the previ- of electricity, “Mughal steel” engines (gas fired electric generators)
ously established Mughal imported and installed a 9.3 having gross generation capacity of 3.1 MW
Steel. The new production MW captive power plant in each along with ancillary equipment and
Mughal Steel (a partnership unit resulted in increased collaboration with GE Jen- Balancing, Modernization and Replacement
concern) was established product line and efficiency bacher. It was the first to go (BMR) of existing bar re-rolling mill
along with “Mughal Trust” for captive power generation

1983 2005 2011 2020

1984 1999 2006 2013 2021

2003 2010 2017

1998

The first corporate as well Mughal Steel began a The BoDs elected to change the MISIL installed a coal gasification Mughal Steel ventured into
as the mini section mills new era in Pakistan steel name of the company from plant in 2011 and further in 2013 exports of copper ingots by
were commissioned making by importing and Mughal Steel to Mughal Iron & installed a new tandem section establishing non-ferrous seg-
under the name of Mugh- establishing 2 Induction Steel Industries Limited (MISIL). In mill with annual capacity of
al Sons (Pvt) limited ment and completion of BMR
Furnaces. the same year MISIL installed bar 300,000 MT. Tandem Section of girder re-rolling mill and
re-rolling mill with capacity of Mills is a novel approach to re- rebar rolling mill.
150,000 M/T. rolling industry in Pakistan
Source: Company Report
 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 — plant capacities (’000 tons) Industry gross profits rebounding in FY21

6000 0.18
Ittefaq
Agha, , 120 ,
250 , 3% 5000 0.15
6%
Dost, 350 , 4000 0.12
8% *Others ,
1,520 , 3000 0.09
Mughal, 37%
430 , 10% 2000 0.06

1000 0.03
Amreli,
Capacities 0 0
600 , 15%
coming FY16 FY17 FY18 FY19 FY20 9MFY21
online in
FY22, 870 Mughal - (GP) ASTL - (GP)
, 21%
*(Non-listed) - AGHA - (GP) ITTEFAQ - (GP)

excluding PSM Average Industry GMs - RHS

Source: Company Report & AKD Research

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.

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

6.0 5.5 1,000 2.0%

5.2 5.0 900 1.8%
5.0 4.6 800 1.6%
4.1 3.9
4.0 700 1.4%
600 1.2%
3.0 500 1.0%
2.1 400 0.8%
2.0
300 0.6%
1.0 200 0.4%
100 0.2%
- - 0.0%
FY18 FY19 FY20 FY21 FY22B
(1.0) (0.5)
FY15 FY16 FY17 FY18 FY19 FY20 FY21P FY22B PSDP (PkRbn) PSDP as a % of GDP

Source: Budget FY22, Economic Survey & AKD Research

 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).

Avg. household size per population: regional comparison Cement demand vs. Rebar demand
70,000 350
160 9

8 60,000 300
140
7 50,000 250
120
6 40,000 200
100
5
80 30,000 150
4
60 20,000 100
3
40 10,000 50
2
20 - -
1

FY15
FY14

FY16
FY17
FY18
FY19
FY20
FY21
FY22F
FY23F
FY24F
FY25F
FY26F
- 0
Afgh India Bangla Pakistan Indonesia Nepal ….
Total Population (mn) - LHS Cement sales - Tonnes (LHS) Rebar - demand (LHS)

Average household size (number of members) Mughal Rebar sold - RHS

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

….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.

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

95,000 25.0%
85,000
0, 0%
75,000 20.0%
Non-ferrous 26%
65,000
0, 0% 55,000 15.0%
45,000
Girder
35,000 10.0%
27% 25,000
15,000 5.0%
5,000
(5,000) 0.0%
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22F
FY23F
FY24F
FY25F
FY26F
Rebar 47%
Mughal - Net sales (mn) (LHS) ASTL - Net sales (mn) (LHS)
GMs of Mughal (RHS) GMs of ASTL (RHS)

Source: Company Report & AKD Research

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
 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

HSEZ
Pak Steel
PESHAWAR
FF
ISLAMABAD
Ittehad

Dera Ismail Khan

AL mioz
LAHORE
FAISALABAD Mughal Kamran Steel

Ittehad Ittefaq Dost

FF Beco

KARACHI
Amreli Faizan
AGHA Razzaq
Naveena Abbas

Source: Company Report & AKD Research

 AKD RESEARCH

Scrap prices hit 7 year high in May’21 Commodities bull driving scrap prices to a multi – year high
600
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
500
US$287/mt as global demand recovers with economic activity picking up while supply remains
400
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
300 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
200 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
100
upbeat as repair work in flood affected areas both in China and Europe and stupendous US$1trn
infrastructure budget passed by US senate could put upward pressure on scrap prices while
0
Nov-15 Nov-16 Oct-17 Sep-18 Sep-19 Aug-20 Aug-21 decarbonization campaign in both China and Europe will continue to provide further fuel
Scrap Price (US$/ton) Avg.Price - last 5 yr (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
Source: Bloomberg & AKD Research
FY21.
Global scrap and rebar prices at multi — year high

1000

800

600

400

200

Aug-18
Aug-16

Aug-17

Aug-19

Aug-20

Feb-21

Aug-21
Nov-15

Feb-16

Nov-16

Feb-17

Nov-17

Feb-18

Nov-18

Feb-19

Nov-19

Feb-20

Nov-20
May-16

May-17

May-18

May-19

May-20

May-21
Scrap Price ($US/ton) Rebar Price ($US/ton) Avg Scrap Price - last 5 yr

Source: Bloomberg & AKD Research

Scrap Price sensitivity with no pass on

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
EPS (PKR) PSDP of PkR900bn up 42.9%YoY for FY22 will provide further impetus to an already robust de-
Scrap Price (US$/ton) FY22F FY23F
mand. To note, derived steel demand increased by 19%YoY in FY21 and is slated to grow by 10%
Base case US$435/t US$375/t
in FY22. Consequently, local players were able to manage increase in input costs (scrap prices up
(-) 20US$/ton 16.88 19.12
by 90.5% in FY21) through swift pass on (local rebar prices up by PKR38-42K/ton or up by 38% in
(-) 10US$/ton 14.74 16.58
FY21). Our estimates suggest current rebar prices of PKR177-179K/ton reflect scrap prices of
Base case 12.59 14.03
US$535-540/ton — assuming margins to sustain at 4QFY21 levels and PkR/USD of 164. However,
(+) 10US$/ton 10.44 11.49
scrap prices usually take effect with a lag of 45-60 days hence the impact of decreasing scrap
(+) 20US$/ton 8.29 8.94
prices will take effect later. We see positive ramification (through potential inventory gains in
Source: AKD Research
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).

Pakistan scrap imports and price performance

350 400

300 350
300
250
250
200
200
150
150
100
100
50 50
0 0
FY16 FY17 FY18 FY19 FY20 FY21
Iron and Steel Scrap (PKRbn) Scrap Price (US$/ton) - RHS

Source: SBP, Bloomberg & AKD Research

 AKD RESEARCH

Copper prices made 10 year high in FY21 Copper prices rallying on stimulus driven packages
12,000 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-
10,000
tional fuel was provided by supply side disruptions resulting from ongoing trade spat between
8,000 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
6,000
demand for refined copper. To highlight, China is by far the largest importer of copper products,
4,000 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
2,000
years, pulling up China’s share in total imports to 44.2% in 2020 after remaining around 27-28%
0 since 2010. The latest consumption spree in China is buoyed by infrastructure-heavy stimulus to
Nov-15

Sep-18

Sep-19

Aug-20

Aug-21
Oct-16

Oct-17

pull the economy from COVID-driven recession and clean energy drive as the country builds
metals-intensive renewable energy and electric vehicle infrastructure.
Copper Price (US$/ton) Avg.Price - last 5 yr

Source: Bloomberg & AKD Research

Copper Imports: Chinese Vs World

250,000 50%
44%
200,000 38%
32%
150,000
26%
20%
100,000
14%
50,000 8%
2%
- -4%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Chinese imports (US$mn) - LHS World imports (US$mn) China's share in world imports

Source: Comtrade & AKD Research

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.

Chinese copper imports and price performance

60,000 10,000

50,000
8,000

40,000
6,000
30,000
4,000
20,000

2,000
10,000

- -
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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

Source: Comtrade, Bloomberg & AKD Research

 AKD RESEARCH

Copper price sensitivity 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-
EPS (PKR)
ment. The purpose was to not only diversify its product portfolio but to amplify its margins as
Copper Price (US$/ton) FY22F FY23F
Base case US$9000/t US$8700/t
well (FY21-24F GM on non-ferrous segment expected at 20.3%), where the company is poised to
(-) 1000US$/ton 3.00 3.09 record 42.8% avg. contribution in earnings from non-ferrous segment over FY21-24F. Mughal’s
(-) 500US$/ton 6.41 7.02 competitive advantage in long steel comes from its first mover advantage and robust copper
Base case 9.81 10.95 demand globally, which bodes well in the medium run for its copper segment. In 9MFY21,
(+) 500US$/ton 13.21 14.88 Mughal reported gross margin of 26.8% from non-ferrous segment by exporting ~4-4.5K tons of
(+) 1000US$/ton 16.61 18.81 copper ingots. Company’s raw material composition comprises of two different scraps i) com-
Source: AKD Research 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

100,000 10,000

80,000 8,000

60,000 6,000

40,000 4,000

20,000 2,000

0 -
FY16 FY17 FY18 FY19 FY20 11MFY21
Pakistan copper exports (PKRmn) Copper Price (US$/ton) - RHS

Source: SBP, Bloomberg & AKD Research

 AKD RESEARCH

Investment Perspective
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-
Mughal Utilization to increase in FY22-25 ever we have incorporated addition of three melting furnaces, having capacity of 50k tons
each, in each of next three years.
100% 1,320
Electricity constraints fade away, making way for billet expansion: Company’s production
80% 1,100 woes have finally settled with MUGHAL being granted grid load of 79.9MW from LESCO, taking
60%
880 company’s full electricity load capacity to ~102.7MW. Lower energy supplies had previously
660 pushed the company to source billet externally as well as shutting down furnaces in order to
40%
440 reduce operational losses. With the change of fate, a 100% capacity utilization at an expanded
20% 220 rebar capacity of 430k tons would yield energy requirement to total at 63MW, leaving enough
0% -
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
FY15
FY14

FY16
FY17
FY18
FY19
FY20
FY21F
FY22F
FY23F
FY24F
FY25F
FY26F

tons. However, recently company has announced a plan to add 3 melting furnaces where we
Total Production Capacity ( 000 Tons) believe, i) excess energy availability, ii) healthy cash flow profile with cash flow from operation
Actual Production (000 Tons) averaging at PkR5.3bn for FY21-24, and iii) D/E of 70% for next 3 years provides us comfort that
Avg total utilization of Mughal (%) 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
Source: Company Report & AKD Research 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,
Valuation Metrics coming up with a TP of PkR179/sh, implying an upside of 56% at last close. Our conviction on
Terminal Growth 3.0% the scrip stems from healthy gross and net margins of 15%/10% with EBITDA/cash flow from
Adjusted - Beta 1.27 operations generation of PKR11.7bn/PKR6.2bn on average over our investment horizon. Debt to
RfR 8.5% asset for Mughal is projected to stay below 0.3x vs. an average of 0.5x over last 7 years, re-
Market risk premium 6.0% affirming our stance for potential expansion of melting capacity to reduce dependence on exter-
CAPM 16.1%
nally procured billets and further expansion in the non-ferrous segments.

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 - - - -
Source: Company Report & AKD Research
 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
MUGHAL vs KSE100 Index 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),
80% (ii) extension in amnesty scheme, and (iii) potential increase in melting capacity. On the flip
70% side, downside risks could emerge in the form of: (i) unexpected upsurge in scrap prices, (ii)
60%
50%
global rally in copper prices taking a halt, and (iii) removal of duties on imported rebars and PKR
40% deprecation
30%
MUGHAL’s stock performance: Ever since the government announced amnesty scheme for
20%
10%
construction sector, MUGHAL has been one of the front runners with the stock performing
0% 54.4% since Dec’20 against 6.2% for KSE-100, an outperformance of 48.2%. Moving forward, a
-10% number of triggers are expected to materialize as increase in billet capacity reaps dividends
-20%
while upcoming increase in rebar capacity will further propel the earnings. After financing 80%
Jan-21

Mar-21
Apr-21
May-21
Jun-21
Jul-21
Oct-20

Feb-21
Sep-20

Nov-20
Dec-20

Aug-21
Sep-21

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-
MUGHAL KSE-100 Index
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
Source: PSX & AKD Research 0.18x, we expect the stock to continue performing with our TP of PkR179/sh providing an upside
of 56%
 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.

MUGHAL: Income Statement

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
Source: Company Report & AKD Research
 AKD RESEARCH

MUGHAL - Annual Financial Data Bank

Valuation Multiples
KATS Code MUGHAL (Year End June-30) FY19 FY20 FY21E FY22F FY23F
Bloomberg Code MUGHAL.PA
EPS 4.70 2.03 12.65 22.40 24.98
Price PkR 114.8
Market Cap (PkRmn) 33,505.0 Earnings Growth 6.4% -56.8% 523.1% 77.0% 11.5%
Market Cap (US$mn) 202.33
Shares (mn) 291.86 BVPS 29.8 32.4 54.9 68.4 83.4
Free Float Shares (mn) 72.96 PER 21.2 49.0 9.1 5.2 4.6

3MHigh(PkR) 117.33 P/BVS(x) 3.9 3.6 2.1 1.7 1.4

3MLow(PkR) 99.27 Topline Growth 38.7% -11.4% 59.9% 58.4% 6.5%

1YrHigh(PkR) 119.75 Gross Margin 10.3% 9.6% 15.7% 15.0% 15.3%

1YrLow(PkR) 60.62 Net Profit Margin 4.5% 2.2% 8.5% 9.5% 9.9%

3MAvgTurnover'000 431.8 EBITDA Margins 9.0% 8.2% 14.5% 14.3% 14.4%

1YrAvgTurnover'000 1,218.90 ROA 6.8% 2.5% 11.1% 15.0% 15.6%

3MAvgDTValue(PkR'000) 47,522.97 ROE 18.3% 7.6% 30.5% 36.3% 32.9%

3MAvgDTValue(US$'000) 286.97 Dividend Yield 1.0% 0.0% 4.4% 7.8% 8.7%

1YrAvgDTValue(PkR'000) 103,236.78 DPS 1.2 - 5.1 9.0 10.0

1YrAvgDTValue(US$'000) 623.41

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
(PkRmn) FY19 FY20 FY21E FY22F FY23F
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

(PkRmn) FY19 FY20 FY21E FY22F FY23F

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

Source: Company Report & AKD Research

 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

Source: Company Report & AKD Research

AKD RESEARCH

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