Karachi, July 25, 2022 (PPI-OT): MUGHAL: Earnings to decline in 4QFY22 due to higher tax

We present earnings estimates for Mughal Iron and Steel Industries Limited (MUGHAL) ahead of the FY22 result announcement. We expect the company to post 4QFY22 EPS of Rs1.0 (down 64% YoY), taking FY22 EPS to Rs14.0, +37% YoY.

Despite higher margins on account of timely pass-on of cost hikes in 4QFY22, we expect a sequential drop in earnings of 60% QoQ over the recently imposed 10% additional super tax. However, even with 4Q effective tax rate escalating to 70%, the company is expected to report an effective tax rate of ~19% for FY22 due to tax benefits and reversals booked in 9MFY22.

Going forward, we expect volumetric sales for the ferrous segment to remain dull in FY23 due to fiscal consolidation, resulting in a slowdown in construction activities. However, as macro clarity emerges, an improving demand outlook could provide MUGHAL the required room to continue passing on cost increases to consumers.

Super tax to slash profitability

We preview Mughal Iron and Steel Industries Limited (MUGHAL)’s profitability for 4QFY22 where we expect the company to post earnings of Rs333mn translating into an EPS of Rs1.0 (down 64% YoY) for the quarter, taking full year EPS to Rs14.0, up 37% YoY. During the quarter, top-line is expected to expand by 20% YoY mainly due to higher selling prices for the ferrous segment. In addition, effective management of scrap inventory and timely price pass-on coupled with pre-buying witnessed in June, are estimated to take the quarter’s gross margins over 13% +(+1 ppt QoQ). Having said that, earnings are expected to decline over higher financial charges and imposition of 10% Super Tax. We do not expect any dividend announcement alongside result.

Global slowdown to play its role

Slowdown in global demand and rising inventories have been playing their part to keep international prices in check for ferrous scrap and steel. Prices for ferrous and non-ferrous metals both have been under pressure due to worries of tight monetary policies in developed economies and a possible slowdown in Europe and the US in the coming quarters.

Going forward, we expect volumetric sales for the ferrous segment to remain dull in the local market as well, due to fiscal consolidation resulting in a slowdown in construction activities. Consequently, we expect the company to show a 10% YoY decline in volumetric sales during FY23.

Rupee devaluation may restrain margins

Steel scrap is close to 60% of a rebar manufacturer’s manufacturing costs, hence a key risk is the continuation of sharp PKR deprecation against the US$, limiting the company’s capacity to pass the burden to consumers, restraining company’s margins from here onward.

The likely dip in earnings for FY23 combined with uncertain near-term demand outlook is likely to drag short term stock price performance. However, as macro clarity emerges, a better demand outlook could provide Mughal the required room to continue passing on cost increases to consumers.