Helped by fast-increasing public investment in large energy, transport and road infrastructure projects, and growing private construction activity across Punjab, Mughal Iron and Steel Industries Limited is forging record profits.
Building on its growth momentum of last year, the company’s revenues have jumped by 78pc to Rs9.87bn during the first six months of 2015/2016 to December from Rs5.55bn a year ago in spite of declining steel prices and imposition of regulatory duty on raw materials.
Consequently, its gross profits rose by over 80pc to Rs1.05bn from Rs583m with pretax profits almost tripling to Rs628m from Rs220m.
The company says the year 2014-15 “marked a turning point in the company’s earnings situation” as its sales rose by 105pc to a record Rs12.24bn from Rs5.97bn a year earlier with the earnings per share spiking to Rs8.12 from Rs4.76
The directors’ report for the period said the improved electricity supply, sales contracts, and decline in (raw) material and oil prices facilitated production and margins, which further helped to accelerate growth.
Talking to Dawn, Mughal Steel Chief Operating Officer (COO) Shakil Ahmed said the substantially increased demand for his company’s products — particularly steel bars — for the coal power projects, as well as metro bus and train projects launched by the government in different districts of Punjab including Lahore, Multan and Sheikhupura was a major contributor to the spike in its sales revenues. But, he added, traditional housing market had also played a significant role in pushing the company’s revenues.
The company was able to secure more orders during the period between July and December 2015, which include, but are not limited to, contracts for supply of steel bars for FWO projects, 1223MW and 1180MW RLNG based power plants in Bhikki and Baloki.
Going forward, the directors’ report in the unaudited half-yearly report said, “We expect further improved margin and increased turnover volume. However, (the) overall turnover may be affected by declining sale price in the local market.”
During the period under review, the balance sheet footing stood at Rs11.13bn compared to Rs11.47bn and the breakup value of share increased to Rs31.33 from Rs31.15. Current ratio increased to 1.37:1 from 1.20:1. Trade debts increased from Rs473m to Rs992m mainly due to increase in sale of steel bars. Deferred liabilities rose from Rs300m to Rs493m on provision of deferred taxation.
In order to reap on the increased public investment on infrastructure construction in Punjab, Shakil said, the company, which operated at almost half of its installed capacity in 2014/2015 owing to the power shortages, planned to continue to invest in technology replacement and capacity enhancement. With a view to reducing its dependence on public sector power utilities as demand for its products soars, it also plans to set up a 55MW coal power plant under a separate entity — Mughal energy. The company already has a gas-fired 9MW plant.
“We have sought permission from the Securities and Exchange Commission of Pakistan (SECP) to let us use the funds we had raised through the sale of the company’s shares on the stock exchange last year for capacity enhancement,” the Mughal Steel COO said.
Mughal Steel had raised Rs930m through public offering of a quarter of its shares of Rs10 each at a hefty premium of Rs24 last year. Initially, the debt-heavy company planned to use the large chunk of these funds for its working capital requirements.
The company says 2014/15 “marked a turning point in the company’s earnings situation” as its sales rose by 105pc to a record Rs12.24bn from Rs5.97bn a year earlier with the earnings per share spiking to Rs8.12 from Rs4.76.
Stock analysts say the domestic steel sector is rapidly expanding and with the demand exceeding production. “The gap is currently being filled by imported steel. The demand is likely to rise further in near to medium term, especially in Punjab, because of the government’s increased investment on mega infrastructure projects,” said an analyst Shahid Zia.
He was of the view that Mughal Steel was in an advantageous position to further improve its sales and profits immediately because it had diversified product portfolio and its lower capacity utilisation level allowed it to raise its production immediately. “The installation of the 55MW coal power project will help increase reliance on in-house power and save on energy bill. Replacement of technology will further add to its profits.”
Heavily indebted, the company management has chalked out a strategy to offload its long-term loans to cut the finance cost, a major burden on its revenues. Helped by a low interest rate regime and improved sales and cash flow, the company is gradually slashing its debt liability.
In the first six months of the current year, for example, it repaid its long-term debt amounting to Rs97m while its majority shareholders injected an interest free loan of Rs318m on top of Rs684m pumped last year for repayment of the long-term loans. In 2014/2015, the company had paid off Rs189.75m of long-term debt.
“The company has adopted a strategy to utilize maximum cash profit for the repayment of bank loans,” its annual report for last year said. “Operating cash flows are being used mainly to repay the debt. Long-term financing from the banking companies stood at Rs254m at the end of June 2015 compared with Rs443m a year earlier. No interest bearing funds were borrowed on long-term basis during the year.”
The company’s short-term debt also came down by Rs756m to just above Rs2bn last year. “Cash flow projections indicate availability of sufficient funds for timely retirement of long-term financing from banking companies,” the annual report for 2014/2015 said.
Published in Dawn, Business & Finance weekly, March 14th, 2016