Print Print 2020-03-05

Descon Oxychem Limited

Descon Oxychem Limited (PSX: DOL) was established in 2004 as a private limited company under the Companies Ordinance, 1984 (now Companies Act, 2017). Four years later, in 2008, it was converted into a public limited company.
Published March 5, 2020

Descon Oxychem Limited (PSX: DOL) was established in 2004 as a private limited company under the Companies Ordinance, 1984 (now Companies Act, 2017). Four years later, in 2008, it was converted into a public limited company.

It is primarily engaged in the business of manufacturing, procuring and selling hydrogen peroxide and allied products. Its various products are used in the mining, textile and food and beverages industries. For instance, the company’s products find its applications in leaching in the mining industry, bleaching in the textiles sector and Descon’s ASEPTOX 35 is used in the food and beverages industry.

Its sales are not just limited to the domestic industries. The company also sells in the international market, such as the Middle East.

Shareholding pattern

A significant 61 percent share of the company is owned by the associated companies, undertakings and related parties. A breakdown of the same reveals that DEL Chemicals Private Limited holds the vast majority - at 51 percent. The second key shareholder of Descon Oxychem is the local general public that holds close to 34 percent of the shares followed by joint stock companies owning almost 5 percent. Directors, CEO, their spouses and minor children together hold less than 1 percent.

Historical operational performance

Descon Oxychem has consistently improved its topline over the years, with the exception of FY12 and FY15, while profit margins have mostly seen a positive growth trend. However, between FY18 and FY19, differing trend has been noticed, where gross margins remained more or less flat, operating margins improved noticeably, whereas net margins declined by around 1 percent.

Looking at the last five years primarily, the topline of DOL declined by almost 6 percent year on year in FY15 due to a fall in the selling price of peroxide. The reason was dumping of imported peroxide from Bangladesh. With cost of manufacturing consuming around 81 percent of the net revenue, it is not surprising that the company recorded a net loss of Rs119 million, almost double of that recorded the previous year. While most other elements remained flattish relative to net revenue, an increase in other expenses is seen. This was due to fixed assets written off during the year.

In FY16, the company managed to report growth in its topline - at a little over 12 percent. This can be attributed to the application filed by the company to the National Tariff Commission (NTC) to impose anti-dumping duties. In addition, the company also attempted to sell to markets which earned them better profits.

Another positive element during the year was uninterrupted power supplies along with reduced rates. The company claims to have improved their operations, which is evident from the decline in cost of sales relative to the topline. A significant decline was also seen in the finance costs.

FY17 was a good year for Descon Oxychem and Pakistan at large with real GDP growing to 5.3 percent in FY17. The company recorded a year on year growth in topline at nearly 24 percent - the highest thus far. The company continued to sell in profitable markets while continuously curtailing costs. As a result, the cost of manufacturing took up 74 percent of the topline as compared to last year’s 78 percent. Finance costs further reduced, making up less than 1 percent of net revenue, while other income declined due to reduction in net gain on insurance claim of assets written off.

Descon Oxychem’s growth momentum continued through FY18, whereby topline grew by 6.5 percent annually. According to the company’s annual report, this was as a result of an improvement in price with a simultaneous control on costs. This is evident from cost of manufacturing’s share in net revenue reducing from 74 percent in FY17 to 70 percent in FY18. An increase in ‘other income’ was observed of which a major contributor was the ‘reversal of provision for doubtful debt’ and ‘others’.

While FY19 was a difficult year for the economy as well as businesses, it is commendable to see a year-on-year growth of almost 30 percent in Descon Oxychem’s topline. Cost of manufacturing’s share in net revenue has also reduced, albeit marginally, while in absolute terms it has gone up. This was due to switching from local gas to RLNG. The noteworthy reduction in distribution costs in attributable to ‘classification to cost of sales ‘Revenue from contracts with customers’’. Contrary to previous trend, finance costs experienced a surge due to an increase in interest and mark up on long term finances.

Half yearly results and future outlook

The 2 percent year-on-year decline in topline is a result of decline in prices in the international market, while an increase of nearly 19 percent in cost of manufacturing is a consequence of using 100 percent RLNG; during FY19 the company was using a mixture of natural gas and RLNG. A significant hike in finance cost during the period was due to ‘conversion of preference share capital into inter-company loan’. Thus, the net profit halved from Rs 315 million in 1HFY19 to Rs 143 million in 1HFY20.

With double digit inflation figures, devaluation of currency and in increase in policy rates, it has become immensely challenging to do business, and remain profitable. However, Descon Oxychem hopes to come up with strategies to minimise costs and explore new markets.

Copyright Business Recorder, 2020

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