September 28, 2020: VIS Credit Rating Company Limited (VIS) has assigned the initial entity ratings of ‘A/A-2’ (Single A/A-Two) to Mughal Iron & Steel Industries Limited (MISIL). The medium to long-term rating of ‘A’ denotes good credit quality coupled with adequate protection factors.

Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-2’ denotes good certainty of timely payments. Liquidity factors and company fundamentals are considered sound. Outlook on the assigned rating is ‘Stable’.

MISIL is considered one of the major players in the long steel sector of Pakistan. Product portfolio of the company comprises steel rebars, girders and t-iron. Steel rebars and girders are the key revenue generating products. The assigned ratings take into account extensive experience of sponsoring family who has been involved in the steel sector since 1950. The ratings draw comfort from sizeable scale of melting and re-rolling mill capacities, underpinned by installation of two new furnaces and completion of balancing, modernization and replacement (BMR) of existing re-rolling mill in 4Q2020.

While the company exhibited healthy increase in revenue and profits in the past few years, slowdown in economic activity and outbreak of COVID-19 has adversely affected financial performance during 9MFY20. Gross margins declined as the company could not pass the full impact of higher raw material prices onto consumer. However, the ratings factor in projected growth in volume sales, underpinned by recent uptrend in rebar prices, which along with the completion of BMR of re-rolling mill, is expected to bode well for the margins to some extent due to energy and overheads efficiencies.

Liquidity position of the company was also under stress owing to significant decline in cash flows generation mainly as a result of higher finance cost and taxes paid, which resulted in low debt service coverage. While improvement in cash flow generation is expected in FY21 and beyond on account of higher projected profits along with an expected major tax benefit, coverages are projected to remain slightly above the minimum threshold over the next three years as major debt repayments would fall in that period.

Increase in equity base is attributable to internal capital generation and contribution from sponsors. Debt profile of the company comprises a mix of short-term and long-term financing facilities. Working capital requirements are met through short-term borrowings. The company has also mobilized long-term debt during the period under review to finance the said BMR. Resultantly, though manageable, gearing and debt leverage were slightly on a higher side.

With the issuance of Sukuk instrument and higher short-term borrowings for working capital requirements, leverage indicators are projected to increase in FY21 and decrease subsequently. Going forward, the ratings are dependent on achievement of projected revenue and profits, improvement in cash flow generation and coverages, and maintenance of leverage indicators within prudent limits. While the demand for steel sector is showing signs of recovery on account of construction industry relief package and the government’s spending on construction of development projects, sustainability of demand over the long-term period will be an important rating factor.

VIS

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