December 29, 2021 (MLN): VIS Credit Rating Company Limited (VIS) has upgraded the entity ratings of Mughal Iron & Steel Industries Limited (MISIL) from ‘A/A-2’ (Single A/A-Two) to ‘A+/A-1’ (Single-A Plus/A-One), and reaffirmed the ratings of outstanding Sukuk at ‘A+’ (Single A Plus) and Commercial Paper (CP) at ‘A-2’ (A-Two), company's filing on PSX showed today.
Moreover, risk factors may vary with possible changes in the economy. A short-term rating of ‘A-1’ depicts high certainty of timely payment where liquidity factors are excellent and supported by good fundamental protection and minor risk factors. The previous entity rating action was announced on September 25, 2020.
The press statement issued by VIS stated that the assigned ratings take into account the company’s position amongst major players in the long steel sector of Pakistan.
The product portfolio of the company comprises steel rebars, girders, billets, and copper ingots. While steel rebars and girders are the key revenue drivers, the export of copper ingot has also contributed well towards overall top-line growth and margins improvement over the past one and a half years.
The assigned ratings also take into account extensive experience of sponsoring families in the steel sector and establishing relations with the customers. The ratings draw comfort from an increase in melting and re-rolling capacities, underpinned by the installation of new furnaces and completion of balancing, modernization, and replacement (BMR) of bar re-rolling mill which attained commercial operations on June 01, 2021, it added.
The ratings draw support from sizeable growth in revenue and profits over the review period. Growth in the ferrous segment was mainly due to higher volumes and selling prices of rebars and girders, supported by sizeable activity in the construction sector.
It further noted that the management expects an upward trend in long steel prices to continue over the next year before any major correction. An increase in the non-ferrous segment was driven by volumetric gains at a higher average selling price of copper ingot owing to a significant surge in international prices led by strong demand from China.
The ratings also factor in a notable increase in gross margins, driven largely by the increased contribution of high-margin non-ferrous segment coupled with improvement in core ferrous segment margins.
The liquidity profile of the company is supported by healthy cash flows generation which underpins the repayment capacity of the company, as reflected in improved debt service coverage ratio despite sizeable long-term debt repayment during FY21.
The current ratio is considered satisfactory and remained largely stable while inventory-plus-receivables to short-term borrowings ratio improved slightly as the company has also mobilized long-term Sukuk to meet working capital requirements.
Sukuk has been issued for a period of 5 years including a 1-year grace period and is repayable in 16 equal quarterly installments, with the last installment due in April 2025. Equity was enhanced with the issuance of right shares in order to retire bridge financing that was mobilized for BMR of bar re-rolling mill during FY21.
Equity base has augmented further during 1QFY22 with the retention of profits. Short-term borrowings increased in line with the enhanced scale of operations and also include commercial paper which is due to be redeemed on July 28, 2022, it said.
The outstanding balance of long-term borrowings decreased due to principal repayment along with no further mobilization during 1QFY22. Leverage indicators are considered manageable. Leverage indicators are projected to improve on the back of internal capital generation despite a slight increase in total debt by end-FY22.
The ratings will remain dependent on the achievement of projected revenue and profits, improvement in cash flow generation and coverages, and maintenance of leverage indicators within prudent limits.
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