By: Ismail Iqbal Securities (Pvt.) Limited
Mughal Iron and Steel Company Limited (MUGHAL), as one of Pakistan’s largest producers of steel for construction purposes, is poised to gain from a plethora of construction plans for the next few years in the country. MUGHAL produces a variety of steel products which are used for construction of bridges, buildings, machineries, etc. and for manufacture of kitchen-ware and surgical instruments. Moreover, the company plans on setting up a 55MW coal fired power plant which will be able to completely meet the power requirement of the existing capacity and thereby lead to higher capacity utilization. We have a December 2015 target price of PKR 55.2/share for MUGHAL, which provides a 16% upside to yesterday’s closing price. Therefore, we are adopting a POSITIVE stance on the stock. We advise investors with average risk tolerance to invest in the stock, but investors with low risk tolerance should wait till after the announcement of the Federal Budget (which can include imposition or withdrawal of key duties on imports of steel products) before investing in the stock.
Capacity Utilization to improve slightly: MUGHAL has been operating at a dismally low capacity utilization level of less than 20% for the past couple of years due to (i) competition due to imports, and (ii) power and gas outages. Moreover, the company has recently increased capacity which means that its utilization will be even lower this year. In fact, the purpose of conducting the IPO was to utilize the proceeds for a new 7.5MW induction furnace and to increase the capacity of one of MUGHAL’s re‐rolling mills by 30%. This capacity expansion, along with two 6MW induction furnaces and a tandem section mill installed in 2013‐14, have led MUGHAL’s melting capacity to 384,000 MT and re‐ rolling capacity to 675,000 MT.