Octopus Digital Limited (PSX: OCTOPUS) was incorporated in Pakistan as a private limited company in 2017 as Avanceon Digital (Private) Limited. The company changed its name to Octopus Digital (Private) Limited in 2019. It was converted into a public limited company in 2020.
OCTOPUS is a wholly owned subsidiary of Avanceon Limited.
The company is engaged in carrying out IT-enabled services which involve information storage, online assessment and monitoring of employee performance, online screening of cost and production efficiency, online plant and machinery maintenance as well as selling and trading of relevant software and equipments.
Pattern of Shareholding
As of December 31, 2024, OCTOPUS has a total of 157.263 million shares outstanding which are held by 8329 shareholders.
Avanceon Limited is the largest shareholder of OCTOPUS with a stake of 74.32 percent in the company followed by the local general public holding 16.90 percent shares of OCTOPUS. The remaining shares are held by other categories of shareholders.
Historical Performance (2020-24)
Except for a downtick in 2024, OCTOPUS’s topline and bottomline has followed an upward trajectory over the period under consideration. A sneak into the margins of the company shows that the gross margin followed a persistent downward route from 2019 to 2022 followed by an uptick in 2023.
Conversely, operating, and net margins picked up in 2020, followed by a significant plunge in 2021. Both the margins registered recovery in 2022 followed by a downtick in 2023. All the margins fell drastically in 2024 (see the graph of profitability ratios). The detailed performance review of each of the period under consideration is given below.
In 2020, OCTOPUS’s topline multiplied by 1401.45 percent to clock in at Rs.277.11 million. This was the year when the company entered into a contract with Avanceon Limited (the holding company) under which OCTOPUS acquired the After Market Support (AMS) segment of Avanceon by issuing 108.4 million ordinary shares of the company at a face value of Rs.10 per share.
In the same year, OCTOPUS also changed its status from being private limited company to public limited company. The spike in sales revenue was the result of AMS segment’s revenue worth Rs.241.242 million transferred to OCTOPUS by Avanceon after deducting an administrative fee.
OCTOPUS didn’t incur any cost of sales in 2019; however, the same grew to Rs.7.75 million in 2020 mainly on account of materials consumed during the year. This translated into GP margin of 97.20 percent in 2020. Operating expense grew by 12.34 percent year-on-year in 2020 primarily due to higher payroll expense as the number of employees increased from 4 in 2019 to 21 in 2020.
Operating profit grew by 5336.76 percent in 2020 with OP margin of 91.57 percent versus OP margin of 25.3 percent recorded in 2019. With 0 percent debt-to-equity ratio, the company didn’t have any finance cost on its books. Net profit grew by 8874.13 percent in 2020 to clock in at Rs.219.74 million with NP margin of 79.30 percent versus NP margin of 13.27 percent recorded in 2019. EPS shrank by 17.96 percent year-on-year in 2020 to clock in at Rs.2.01 due to issuance of shares during the year.
In 2021, OCTOPUS’s topline grew by 125.61 percent year-on-year to clock in at Rs.625.20 million. This was mainly led by 11.16 times rise in export sales during the year. Local sales and services also multiplied by 2.3 times in 2021. Cost of sales grew by 1860 percent in 2021 primarily on the back of installation and travelling charges incurred related to engineering services coupled with materials consumed during the year and back-office support provided by the holding company.
This translated into 75.68 percent escalation in gross profit in 2021; however, GP margin slumped to 75.69 percent. Operating expense grew by 705.46 in 2021 mainly due to massive allowance worth Rs.58.068 million booked against ECL.
During 2021, OCTOPUS also recognized exchange gain and profit of TDR, translating into other income of Rs.11.14 million. Operating profit grew by 42 percent year-on-year in 2021 with OP margin slipping to 57.65percent. Net profit registered 57.44 percent year-on-year growth in 2021 to clock in at Rs.345.95 million with NP margin of 55.33 percent and EPS of Rs.2.53.
In 2022, OCTOPUS’s topline posted 9.89 percent growth year-on-year to clock in at Rs.687.01 million. Due to import restrictions, the company AMS’s revenue, particularly for spare and material-oriented projects, remained low during the year.
Cost of sales grew by a steep 103.59 percent due to Pak Rupee depreciation and high inflation. Gross profit slipped by 20.21 percent year-on-year in 2022 with GP margin narrowing down to 54.96 percent. Operating expense grew by 64.50 percent year-on-year mainly on account of elevated payroll expense as the number of employees grew from 27 in 2021 to 46 in 2022.
Management fee, bank charges and allowance for ECL also significantly grew in 2022. Operating results were buttressed by a massive 2202.94 percent spike in other income in 2022 which was the consequence of exchange gain on its foreign sales as well as mark-up income from the parent company.
Operating profit grew by 19.34 percent year-on-year in 2022, and OP margin also rebounded to clock in at 62.61 percent in 2022. Net profit rose by 17 percent year-on-year in 2022 to clock in at Rs.405.063 million with NP margin of 58.96 percent and EPS of Rs.2.74.
In 2023, OCTOPUS’s net sales rose by 31.46 percent to clock in at Rs.903.118 million. This was mainly on account of revenue from export sales and AMS business services rendered during the year. Cost of sales hiked by 28 percent year-on-year in 2023 primarily on the back of elevated installation charges related to engineering services.
Hefty export sales resulted in 34.26 percent year-on-year rise in gross profit in 2023 with GP margin inching up to 56.13 percent. OCTOPUS registered 31.47 percent higher operating expense in 2023 which was due to increased payroll expense as the company enhanced its workforce to 85 employees, up from 57 employees in the previous year.
Allowance for ECL pertaining to related parties as well as legal & professional charges also surged during the year, making significant contribution to higher operating expense in 2023. Other income mounted by 29.80 percent in 2023 on account of robust exchange gain recorded during the year as well as elevated mark-up income recognized from related parties.
OCTOPUS’s operating profit improved by 21.97 percent in 2023, however, OP margin ticked down to 58.10 percent due to elevated operating expense. During the year, OCTOPUS obtained long-term loan of Rs.14.418 million which resulted in finance cost of Rs.1.63 million. Net profit improved by 27.34 percent year-on-year in 2023 to clock in at Rs.515.808 million with EPS of Rs.3.45 and NP margin of 57.11 percent.
In 2024, OCTOPUS’s net sales dipped by 5.80 percent to clock in at Rs.850.729 million. This was on account of a diminution recorded in export sales due to stability in the value of Pak Rupee. Cost of sales surged by 19 percent in 2024 due to increase in the prices of material consumed during the year coupled with hefty payroll expense as well as fee & subscription charges incurred during the year. This resulted in 25.22 percent decline recorded in gross profit in 2024 with GP margin inching down to 44.56 percent.
Operating expense dipped by 0.50 percent in 2024 on account of lower back-office support charges by the Parent company to share office premises, operational, human resource, and administrative support. Legal & professional charges also considerably shrank during the year. However, it was offset by higher payroll expense incurred during the year as the number of employees increased from 85 in 2023 to 91 in 2024.
Other expense increased by 51.51 percent in 2024 due to exchange loss and current account expense (mark-up) incurred during the year. Other income slumped by 80.78 percent in 2024 due to high-base effect as the company recognized hefty exchange gain in the previous year. OCTOPUS recorded 80 percent thinner operating profit in 2024 with OP margin falling down to its lowest level of 12.31 percent.
Finance cost grew by 117.55 percent in 2024 due to higher discount rate as well as an uptick recorded in the company’s outstanding debt. Gearing ratio was recorded at 0.31 percent in 2024. Although the company obtained external financing in the previous year, it was not geared due to excessive cash & bank balances. OCTOPUS’s net profit dwindled by 82 percent to clock in at Rs.92.437 million in 2024. This translated into EPS of Rs.0.58 and NP margin of 10.87 percent.
Recent Performance (1QCY25)
OCTOPUS’s net sales further slid by 76.54 percent to clock in at Rs.51.424 million. This was due to realignment of the international structure of the company. Until last year, the revenue recognized from all the international projects was executed in Pakistan because the group didn’t have any corporate presence in the ME region.
However, this year, as a part of streamlining of its operations, the revenue from all the international projects was executed to the group entity Octopus Digital FZ LLC, a wholly owned subsidiary in UAE. As a result, the standalone financial statement for 1QCY25 represented drastic decline in net revenue.
Cost of sales also fell by 71.54 percent in 1QCY25 due to the reason explained above. This resulted in 80.75 percent decline in gross profit in 1QCY25 with GP margin falling down to 44.59 percent versus GP margin of 54.33 percent recorded in 1QCY24. Operating expense fell by 26.76 percent during the period under review which was probably also because of the structural changes undertaken by the company.
Other income mounted by 3536.53 percent to clock in at Rs.22.51 million in 1QCY25. This was seemingly due to exchange gain and mark-up income from related parties. OCTOPUS recorded operating loss of Rs.5.25 million in 1QCY25 versus operating profit of Rs.50.50 million recorded in 1QCY24.
Finance cost surged by 1228.13 percent to lock in at Rs.0.85 million in 1QCY25 due to increase in outstanding liabilities. The company posted net loss of Rs.8.025 million with loss per share of Rs.0.05 in 1QCY25. This was against the net profit of Rs.39.486 million and EPS of Rs.0.27 recorded in 1QCy24.
Future Outlook
OCTOPUS is relying on its digitalization business which is making greater strides in the Middle East, US, and many other parts of the world. OCTOPUS is constantly expanding its footprint in diverse geographical markets to offset the impact of sluggish business in the home market. The company is also expanding its digital and aftermarket support (AMS) business in KSA, besides enhancing its presence in the US and European markets to make the most of the region’s thriving business environment.