Descon Oxychem Limited

Descon Oxychem Limited (PSX: DOL) was incorporated in Pakistan as a private limited company in 2004 and then changed its status into a public limited company in 2008 under the approval of SECP. The principal activity of the company is the procurement, manufacturing and sale of hydrogen per oxide and its related products.

Pattern of Shareholding

As of June 30, 2022, DOL has an outstanding share volume of 175.031 million shares which are held by 5,336 shareholders. Associated companies, undertaking and related parties hold 72.62 percent of the total outstanding shares of DOL to be classified as the largest shareholder. This is followed by local general public accounting for 21.78 percent shares of DOL. Joint stock companies hold 2.57 percent shares of the company. The remaining shares are held by other categories of shareholders including Modarbas and Mutual Funds, Pension Funds, NIT and ICP etc, each having a stake of less than 1 percent in the company.

Performance Trail (2018-22)

Except for a marginal 2 percent year-on-year dip in 2020, the topline of DOL has been growing in all the years under consideration. While the revenue dropped, the bottomline continued its growth trajectory and the margins of the company maxed out in 2020. The bottomline posted a drop in 2019 and posted growth in all other years under consideration.

In 2019, the topline posted a tremendous year-on-year growth of 30 percent which came on the back of local sales while export sales plummeted during the year. The cost of sales also grew by 27 percent year-on-year mainly due to the conversion of the industry from local gas to RLNG. Despite soaring cost of sales, gross profit boasted a 35 percent year-on-year growth and GP margin also ticked up from 30 percent in 2018 to 31 percent in 2019. Operating expenses considerably dropped during the year due to classification of a certain amount of freight and forwarding as cost of sales under IFRS 15. Other income plunged during the year owing to a drop in reversal of loss allowance for doubtful debt coupled with the absence of net gain on insurance claims of assets written off. Conversely, other expense rose on the back of an increase in provision for WWF and WPFF due to improved profitability during the year combined with impairment loss recognized during the year on the assets which are no longer expected to be used by the company. Despite the unfavorable movement of other income and other expense, tapered off operating expenses on the back of revised reporting standards enabled the operating profit to magnify by 43 percent year-on-year in 2019 with an OP margin of 24 percent up from 22 percent in the previous year. Finance cost grew by over 13 times not only because of increase in discount rate during the year but also due to intercompany borrowings of Rs.1100 million to redeem preference shares. The company’s capital structure which was entirely equity based since two years recorded a debt-to-equity ratio of 53:47 in 2019.Despite a huge turnaround in the capital structure of DOL which magnified its finance cost by manifold, net profit managed to muster a 22 percent year-on-year increase to clock in at Rs.394.27 million in 2019 with an EPS of Rs.3.87 versus Rs.3.16 in the previous year. NP margin, however, dropped from 15.4 percent in 2018 to 14.6 percent in 2019.

In 2020, amidst the outbreak of global pandemic, the company made a well-timed decision to launch its multi-purpose sanitizer and disinfectant, Sanidol which buttressed DOL’s revenue despite the lockdown which would’ve otherwise marred the performance of the company. During 2020, while the sales volume of the company remained intact, the topline slid of 2 percent year-on-year is on account of price adjustments in line with the market demand. Reduction in crude oil prices proved to be a great opportunity for the company to lower its cost of sales and improve its GP margin which went up to 33 percent in 2020. During 2020, the company has entered into a commercial partnership with Tetra Pak Pakistan which made Aseptox 35 which is being used to disinfect food and beverages packaging. The rise is operating cost also came on the back of trial fee paid for the product approval in food and beverages segment. Other income considerably shrank during the year due to less interest on bank deposits as well as no reversals on loss allowance for doubtful debts made during the year. Other expense also turned out to be favorable and plummeted by 28 percent year-on-year particularly on the back of no impairment loss made and no provisions booked against long outstanding advances during the year. Operating profit rose by a meager 2 percent in 2020 while OP margin clocked in at 25 percent. Finance cost ticked up marginally by 2 percent on the back of high discount rate in the initial quarters of 2020. The company significantly reduced its debt portfolio during the year which culminated into a debt-to-equity ratio of 10:90. The intercompany borrowings were settled by issuing shares to Descon Engineering Limited. The bottomline posted a growth of 6 percent year-on-year in 2020 despite a topline dip. Net profit clocked in at Rs.418.42 million in 2020 with an EPS of Rs.3.42. The decline in EPS is due to increase in the number of shares during the year. NP margin rose to 16 percent in 2020.

The signs of COVID-19 were not completely over in 2021. DOL managed to attain an increase in off-take during the year; however, reduction in prices due to COVID-19 resulted in a topline growth of only 6 percent year-on-year in 2021. Cost of production posted a sharp rise of 23 percent year-on-year in 2021 on the back of depreciation expense due to capacity expansion, shut down expense and increase in utility charges. This trimmed down the gross profit by 29 percent year-on-year in 2021 with GP margin dropping down to 22 percent. Operating expense slightly moved up on the back of Royalty paid to Descon Private Limited for common directorship coupled with loss allowance for doubtful debt booked during the year. Other income and other expense made favorable movements during the year. Other income grew by 146 percent on the back of dividend income from short-term investments and exchange gain. Other expense shrank by 36 percent on the back of low provision for WWF and WPPF. Despite the cost control measures, the operating profit tapered down by 32 percent during the year with an OP margin of 16 percent. The debt-to-equity ratio of DOL moved to 35:65 during the year as the company availed syndicate finance facility to finance its capacity expansion project. However, efficient working capital management and improved cost of debt on account of low discount rate resulted in a 21 percent year-on-year decline in the finance cost during 2021. The bottomline shrank by 33 percent in 2021 to clock in at Rs.278.70 million with an EPS of Rs.1.59. NP margin narrowed down to 10 percent in 2021.

The capacity expansion undertaken by the company in 2021 started bearing fruit the company made a stunning topline growth of 52 percent year-on-year in 2022. The improved sales were the result of higher production, better pricing and enhanced product placement. The capacity expansion blessed the company with economies of scale which improved its GP margin to 26 percent in 2022 with a spectacular 80 percent year-on-year growth in gross profit. Operating expenses grew mainly on the back of increased salaries and wages expense due to additional workforce hired for increased production capacity coupled with high freight and forwarding expense, royalty expense, fee and subscriptions as well as assets written off during 2022. While other income posted a marginal uptick, other expense grew by 146 percent year-on-year in 2022 on the back of WWF, WPPF as well as exchange loss made during the year. Operating profit still managed to post a tremendous year-on-year rise of 89 percent in 2022 with an OP margin of 20 percent. Finance cost thinned down due to long-term debt repayments. The debt-to-equity ratio stood at 13:87 in 2022. The bottomline grew by 69 percent in 2022 to clock in at Rs.470.88 million with an EPS of Rs.2.69. NP margin which petered out to 10 percent in 2021 moved slightly up to 11 percent in 2022.

Recent Performance (1HFY23)

DOL posted an exceptional performance during 1HFY23. Increased demand and high international commodity prices mustered a staggering 81 percent year-on-year rise in its revenue during the year. The company achieved the highest ever export sales volume during the year which became even dearer amid devaluation of Pak Rupee. Although the company faced immense challenges during the year due to high RNLG and energy prices as well as supply chain disruptions, it managed to attain a GP margin of 48 percent in 1HFY23 versus 26 percent during the same period of last year. Gross profit also boasted a whopping growth of 231 percent during the period. Operating expenses massively grew during 1HFY23 on the back of inflationary pressure coupled with high freight and forwarding charges as the company is making inroads into new export markets. Other expense blew up by 235 percent during 1HFY23 while other income posted 448 percent year-on-year growth. Despite rising operating expenses, operating profit posted a 275 percent year-on-year growth with an OP margin of 42 percent in 1HFY23 versus 20 percent during the same period last year. Finance cost moved down by 45 percent during the period despite the record level of discount rate as the company made long-term debt repayments. The bottomline grew significantly by 287 percent in 1HFY23 to clock in at Rs.1007.81 million with an EPS of Rs.5.76 versus Rs.1.49 during 1HFY22. NP margin stood at 29 percent in 1HFY23 versus 14 percent during the same period last year.

Future Outlook

With rising demand both in local and export markets, the topline is expected to climb new highs in the coming times. The better prices earned from export sales coupled with economies of scale achieved through capacity expansion will improve the margins of the company despite inflationary pressure and high energy and fuel prices. Besides, diversification into new markets alongside Textile, Food and mining sectors will open new avenues of growth and create a hedge against margin erosion.