PACRA Maintains the Rating of Mughal Iron & Steel Industries Limited | PP Sukuk

Mughal Iron & Steel Industries Limited (“Mughal” or “the Company”) is a prominent player in the steel industry. The Company is sustaining the pressures that have engulfed other mentionable players in the sector. These are emanating from subdued demand, higher cost of doing business especially the power tariff and the impact of rising finance cost. Mughal has been able to fare the challenges, though the hit on margins is evident, due to some of the peculiar strengths which the company possesses. There is diversity in its product slate, having girders and T-iron, apart from rebars. The Company has deep penetration in the distribution system of the country. Additionally, there is altogether a different and alternative revenue stream, i.e. the copper ingot. This is entirely export oriented, providing shield against the import exposure. This shielded the Company from LC related issues when imports were being a challenge. The business has a good history of rising export. This has provided an edge to the Company over other players. The sector dynamics are not yet promising and the management is expected to keep an eye, especially on two things: volume and margin. The Company is making investments in cheap and alternative energy. Profits margins are expected to take benefit from two things: one once the alternative energy channel becomes operational, and second due to decline in the policy rate. The exports of copper ingots and granules to China accounted for ~21% of revenue in FY24. This not only bolstered the top line but also secured a sustainable profit stream for the future. In FY24, the Company’s top line surged to PKR 92.383bln, representing a considerable year-over-year growth of ~37% from PKR 67.390bln in FY23. This growth was fueled by both increased sales volumes and higher sales prices. However, despite this growth, there was a slight decline in gross margins due to industry related challenges, as explained. Additionally, net margins faced pressure from higher finance costs, with the Company’s leverage ratio reported at ~57% in June 2024, up from 50.6% in June 2023. To support its funding requirements, the Company has relied on banking facilities and debt instruments.
The ratings are dependent upon the Company’s ability to sustain its healthy business profile amidst exposure to overall economic slowdown and higher costs.

About the Entity
Mughal is a public limited company incorporated in 2010, is primarily engaged in the manufacturing and sale of billets, girders, and rebars. Mr. Khurram Javaid is the CEO.

About the Instrument
In Mar’21, Mughal issued PKR 3bln worth of Listed, Secured, and Privately Placed Long-Term Islamic Certificates (Sukuk). The Sukuk has a tenor of 5 years, including a 12-month grace period. Priced at 3MK+1.3% per annum, profit is payable quarterly in arrears on the outstanding principal amount. The security structure entails a first pari-passu hypothecation charge over all present and future movable assets with a margin of 25% in accordance with the issue amount. Additionally, the Sukuk has been upgraded to a pari-passu charge from a ranking charge within 120 days from the final disbursement date. In addition to the conventional security structure, a Debt Payment Account (DPA) is being maintained with the agent bank. One-third of the installment (comprising principal plus profit) is accumulated each month by the 25th day, ensuring that the entire upcoming installment is deposited in the DPA by the 15th day of the third month. As of Sep’24, Mughal has paid a total principal of PKR 1,875mln and markup of ~PKR 1,320mln.