PACRA Assigns the Initial Ratings to Mughal Iron & Steel Industries Limited | PPSTS | PKR 2.5bln | Oct’24

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 face 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 ~22% of revenue in first quarter of FY25. This not only bolstered the top line but also secured a sustainable profit stream for the future. Recently, the board approved a PKR 2bln Balancing, Modernization, and Replacement (BMR) project for the existing steel bar re-rolling mill, aimed at enhancing operational efficiency. In the first quarter of FY25, the Company’s top line increased to PKR 21.584bln, up from PKR 21.032bln in the same period last year. This growth was driven by higher sales volumes and increased prices, though gross margins saw a slight decline due to industry-wide challenges. Net margins were further compressed by rising finance costs, with the Company’s leverage ratio increasing to ~59% in September 2024, compared to around 57% in June 2024. To meet its funding needs, Mughal 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
On October 21, 2024, MISIL issued a PKR 2,500mln Short-Term Sukuk (PPSTS) to strengthen its working capital, with a six-month tenor. This new issuance replaces the previously issued PKR 3,000mln Short-Term Sukuk (PPSTS) that was issued on April 18, 2024, and matured on October 15, 2024. The financial covenants, which were finalized based on a comprehensive due diligence process, which include: i) Minimum Current Ratio at 1.0x; ii) Minimum Interest Coverage Ratio at 1.1x; & iii) Maximum Leverage Ratio at 3.5x will be maintained during the transaction tenor. Although the Sukuk is unsecured, MISIL has confirmed that it has sufficient liquidity in the form of cash, cash equivalents, and/or unutilized credit lines with financial institutions to fully settle both principal and interest by the maturity date.