Pakistan Oxygen Limited

Pakistan Oxygen Limited (PSX: PAKOXY) was established as a private limited company in 1949 under the repealed Companies Act, 1913 (now Companies Act, 2017). In 1958 it was converted into a public limited company. The company manufactures industrial and medical gases, welding electrodes in addition to marketing medical equipment.

Shareholding pattern

As at December 31, 2021, over 45 percent shares are held under the associated companies, undertakings and related parties within which a major shareholder is M/s Adira Capital Holdings (Private) Limited. The local general public owns close to 41 percent shares, while the directors, CEO, their spouses and minor children own around 7 percent shares. Within this, majority are owned by one of the directors, Mr. Shahid Mehmood Umerani. The remaining about 6 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline with the exception of a few years while profit margins, in the last six years, have largely remained stable.

In CY18, topline registered a growth of 10 percent. However, sales for the company were adversely impacted due to the ship breaking segment at Gaddani causing a halt in activities for several months due to safety concerns. On the other hand, the healthcare sector witnessed a 24 percent rise as a result of an increase in demand for medical gases, engineering and installation services. With production cost remaining close to 77 percent, gross margin remained more or less flat at almost 23 percent. However, the improvement in net margin was more pronounced at 8.2 percent, compared to 5.4 percent in CY17, as operating expenses reduced as a share in revenue.

Topline in CY19 contracted by almost 4 percent. This can be attributed to a general slowdown in the economy after the general elections, with Large Scale Manufacturing (LSM) also declining by 3.4 percent, while GDP growth stood at 3.3 percent. While there was little change in gross margin that was recorded at close to 23 percent, net margin reduced to 6.45 percent. The latter was a result of an increase in distribution expense and finance expense as a share in revenue. Distribution expense increased due to an increase in salaries expense, while finance expense increased due to higher interest rates.

Topline recovered in CY20, as it grew by almost 19 percent to cross Rs 5 billion in value terms. This was predominantly a result of a growth in healthcare segment that stood at 69 percent. Contrarily, industrial gases and welding segment was adversely impacted due to the outbreak of the Covid-19 pandemic that led to strict lockdowns. But as cost of production grew to consume 80 percent of revenue, after remaining undeterred at 77 percent for the last four years, gross margin fell to almost 20 percent. Due to an increase in electricity tariffs, the fuel and power expense grew that was largely responsible for the rise in production cost. However, the decrease in net margin was not as pronounced, as it was recorded at 6.2 percent. This was due to a decrease in operating expenses, finance expenses, coupled with some support coming from other income.

In CY21, the company witnessed the largest growth in topline, by over 26 percent to cross Rs 7 billion. This was attributed to a strong performance in all the segments of the company. The healthcare segment primarily saw the largest growth as the company supplied oxygen to hospitals across the country. The Medical Engineering Services (MES) also saw growth as healthcare providers looked to upgrade facilities to be able to cater to the rising number of Covid-19 patients. Moreover, the growth in LSM reflected in the industrial gases segment. However, gross margin reduced, albeit marginally, since production cost grew to 80.6 percent of revenue. However, net margin improved, again only marginally, as operating expenses, coupled with finance expense reduced as a share in revenue.

Quarterly results and future outlook

Topline in the first quarter of CY22 grew by 20 percent year on year as all the business segments of the company performed well. Hard goods segment posted a growth of 31 percent while healthcare grew by 21 percent. The company catered to hospitals in both, the public and the private sector. While gross margin remained similar year on year, net margin reduced to 6.5 percent compared to 7 percent in 1QCY21, due to a rise in finance expense as a share in revenue.

Revenue in the second quarter was lower by 4.4 percent year on year. While gross sales were marginally higher by 1.6 percent, it was the high trade discount and sales tax that drove down net sales year on year. But as cost of production was lower at 80 percent of revenue, versus almost 83 percent in 2QCY21; gross margin improved to 19.7 percent for the period. But net margin was again lower at 4.3 percent compared to 5.5 percent in 2QCY21, due to a considerably higher finance and taxation expense. While topline has increased, the rising input costs combined with finance and taxation expense can pose a challenge for future profitability.