Mughal Iron and Steels Limited (MUGHAL), based in the Northern region is one of Pakistan’s leading

manufacturers of long steel products. Company’s major revenue is derived from sales of rebars, girders
and T-Iron. The company is in talks to raise PKR 2 billion, with additional green-shoe option of PKR 1
billion, through issuance of Sukuk. The entity plans to utilize the proceeds to increase their working
capital in light of additional requirement due to enhancement of capacity and ramping up of production.
The issue is priced at 3-month KIBOR plus 1.3% with a tenor of 5 years.  
 

Key Metrics (Company projections)  FY21e  FY22e  FY23e 

EPS  4.2  5.1  5.9 
Gross Margin  9.2%  9.2%  9.3% 
DPS  2.0  2.0  2.0 
Payout ratio  48%  39%  34% 
ROE  12.1%  13.6%  14.2% 
Debt-to-equity  1.90  1.75  1.34 
 

The outlook for the long steel sector is positive. Since GDP growth is likely to recover amidst stable
macroeconomic environment in a post-COVID scenario, demand from construction sector is likely to
grow going forward. Moreover, government has taken steps for promoting the real estate sector like
lowering tax rates for builders, an amnesty scheme for those starting their projects before Dec 2020 and
mandating banks to lend 5% of their total advances to the construction industry. In addition,
construction of dams, housing units under Naya Pakistan housing and CPEC projects can further
augment demand.   

To cater to the expected increase in demand, company is in the process of expanding both its melting
and rolling capacity by 117% and 61% respectively. Moreover, the total sanctioned load of 80MW has
been available to the company, removing a key bottleneck that the company used to face in the past
which hampered its production and decreased the realized gross margin. 

Therefore, we believe company’s profitability is going to improve going forward. Moreover, company’s
projections are quite conservative since gross margins are assumed around 9% going forward, whereas,
the actual gross margin for 4QFY20 was 10.4%. Our calculations indicate that company will have ample
cash flows, generated primarily by increase in sales, to repay the installments of the issue and make
timely profit payments as they fall due. Therefore, we recommend subscribing to the issue.