Descon Oxychem Limited (PSX: DOL) was set up in 2004 as a private limited company under the Companies Ordinance,1984. It was later converted into a public limited company in 2008. The company manufactures, procures, and sells hydrogen peroxide and allied products, that are used in mining, textile and food and beverage industries. The company is also present in the international market, particularly the Middle East, in addition to catering to the local market.
Shareholding pattern
As at June 30, 2020, over 73 percent shares are held in associated companies, undertakings and related parties. Major shareholders within this category are Descon Engineering Limited and DEL Chemicals (Private) Limited (CDC). The local general public owns nearly 15 percent of the shares followed by over 6 percent in foreign companies. the directors, CEO, their spouses and minor children own less than 1 percent share in the company while the remaining about 5 percent shares are with the rest of the shareholder categories.
Historical operational performance
Since FY12, the company’s topline has contracted three times, while profit margins grew until FY18, after which they have been relatively stable.
During FY17, Descon Oxychem witnessed the highest growth in topline thus far, at almost 24 percent. This was due to a number of factors. The company changed its market geographies to more profitable areas, in addition to uninterrupted power supply at effective rates. Power and fuel expense is generally a major cost component. The company was also continuously attempting to curtail costs as is evident by the production cost making 74 percent of revenue, compared to over 78 percent in the previous year. Overall, operating expenses also saw slight reductions. Finance expense that previously made almost 5 percent of revenue, was nearly eliminated in FY17 due to “conversion of sponsor’s loan into preference share capital, repayment of long-term loans, decrease in discount rates, and effective working capital management”. Thus, net margin grew from 2.8 percent in the previous year to over 10 percent in FY17.
At 6.5 percent, revenue growth was a little subdued in FY18, in comparison to the double-digit growth witnessed in the last two years; topline crossed Rs2 billion. This was a result of a pricing initiative. With continuous focus on reducing production cost, gross margin also improved to over 29 percent. Production cost further reduced to 70 percent of revenue. With finance expense shrinking and additional support coming from other income, the higher gross margin also trickled down to the bottomline; net margin were recorded at 15.4 percent. The higher other income was due to “reversal of provision for doubtful debt” and “others”; the details of the latter were not known.
Descon Oxychem witnessed the highest revenue growth in FY19 at over 29 percent. This was partly attributed to the currency devaluation. Since the company also sells to the international market, currency devaluation made exports more favorable in the global arena. Moreover, production cost reduced marginally to 69 percent, therefore allowing gross margin also to improve slightly to 30.7 percent. Selling and distribution expense nearly halved year on year due to “adoption of IFRS 15, ‘Revenue from Contracts with Customers’. Finance expense appeared again due to “intercompany borrowing for redemption of preference shares”; combined with a higher tax expense, the higher gross margin could not be translated into a higher net margin. The latter was recorded at 14.5 percent, although in value terms, bottomline was higher year on year at Rs394 million compared to Rs 322 million in FY18.
After rising consecutively for four years, revenue in FY20 contracted by 2.3 percent. While price adjustments also played a role, volumetrically too, sales were lower. Despite the price reduction, the company was able to improve its gross margin on the basis on cost reduction, as production cost made 67 percent of revenue, compared to over 69 percent in the previous year. Therefore, gross margin was recorded at an improved 32.3 percent. This also trickled down to the bottomline as overall expenses remained nearly similar year on year. Thus, net margin stood at 15.82 percent- the highest so far. Descon Oxychem was able to prevent a major revenue loss as the Covid-19 pandemic struck, by introducing a disinfectant and sanitizer since the usual customers were shut down.
Quarterly results and future outlook
Revenue in the first quarter of FY21 was lower by 1.4 percent year on year, while volumetrically sales were lower by over 8 percent. This was attributed to a planned shut down for 45 days to conduct routine maintenance and plant expansion. This also resulted in higher costs due to the maintenance, and an impact of one-off high utilities factors. As a result, net margin at 2.2 percent was significantly lower than 8.6 percent in 1QFY20.
The second quarter also saw lower revenue by almost 5 percent; in volume terms, sales were higher by 7 percent. But production cost kept the gross margin from increasing. The increase in cost was again attributed to the maintenance and expansion. However, the drop in distribution and finance expense allowed net margin to be better in the current period.
The third quarter saw higher revenue year on year, by 10.7 percent. But costs were also higher as international prices for brent crude oil and packing material increased. Therefore, profitability was marginally lower in 3QFY21.
The company undertook expansion that helped it to enhance production capacity. It is also looking to enter newer markets and diversify.
Comments
Comments are closed.