Descon Oxychem (PSX: DOL) was established in 2008. As one of the market leaders in the domestic market for hydrogen peroxide, it supplies customised chemicals primarily for textiles but also for food and beverage safety, industrial and consumer markets. As part of Descon chemical line of business, it is exploring growth in international markets for pulp & paper, cosmetics, and electronics manufacturing.
Industry overview
Bleaching is the primary property of hydrogen peroxide, for which it is used in many industries. Globally, the hydrogen peroxide market in about 4.6 million tons, contributing between 12 to 15 percent towards worldwide chemical industry revenues. Globally, textiles, pulp & paper and semi-conductor industry are the major consumers of hydrogen peroxide but domestically its sales are concentrated in the chemical sector.
Hydrogen peroxide is particularly effective for bleaching natural fibers but can also be used to bleach synthetic fibres, under certain conditions. Its bleaching improves the consistency of dye transfer to the fabric. Cotton bleached with hydrogen peroxide has a stable whiteness, a soft touch and an absorbency that improves the dyeing of the fabric.
Recently, the textile sector has been experiencing a shortage of hydrogen peroxide, which has driven up prices. The All Pakistan Chemical Manufacturers Association (APCMA) has attributed this situation to regional price hikes and demand and supply conditions. Currently the industry is protected by 11 percent tariffs. However, over the years Sitara Peroxide as well as Descon have approached NTC for anti-dumping duties to compete with imports from China.
Financial overview
While Descon has enjoyed an increasing topline in recent years, it received its most significant dip in FY12. 2012 was a challenging year for the company because international prices dropped by over 35 percent due to economic slowdown in the first half of the year. As a result, imports into the country increased, giving tough competition to DOL. Persistent energy shortages further compounded the problem and together these issues resulted in losses that persisted till 2016.
Price and volume together was able to increase topline and helped stem the bottomline losses in FY13. FY14 saw a continuation of losses requiring a Rs 700 million loan to provide much needed support to the capital structure and to conserve cash outflow. Revenue and net profit both decreased in FY15 due to a decrease in average selling price because of competition from peroxide imported from Bangladesh.
The turnaround year for DOL was FY16 when changes in market geographies, migrating sales to areas with higher profitability, improvement in manufacturing efficiencies and grid and alternate sources of power supply together brought the bottom line out of red. This trend continued in FY17 when cost of sales was controlled and gross profit was increased by nearly 50 percent, resulting in the highest profit after tax since its incorporation. Improved selling prices, enhanced productivity and changes in marketing strategy all helped drive an increase in revenue as well as profit. Furthermore, finance cost was brought down by converting sponsor's loan into preference shares.
1HY18 Performance
Despite recent promising trends, 1HY18 has not been rosy. Though there has not been a dive back into losses as yet, topline declined along with a double digit decline in bottomline. Gross profit margins and net profit margins decreased as well.
Since prices have driven up in the market recently, it seems likely that the topline has declined due to decrease in volume. This happened despite Descon bringing down production losses significantly in the last fiscal year through debottlenecking.
Though distribution and selling costs as percentage of sale has been brought down, administrative expenses have increased significantly, negating the affect. Lower volumetric numbers and higher overheads together drove down the profit for the period.
Future outlook
Since hydrogen peroxide is one of the main chemicals used by the textile industries, its demand is strongly linked to trends in that sector. Though not improving by leaps and bounds, textile exports for 7MFY18 have increased by 7 percent, as per PBS data indicating increasing demand for Descon's product. There is no lack of demand for hydrogen peroxide since domestic production capacity is about 60,000 tons against a requirement of 70,000 to 80,000 tons.
The main competition it faces is from imports. Currently the All Pakistan Textile Processing Mills Association (APTPMA) has been clamouring to allow imports of hydrogen peroxide at 0 percent tariffs. However, Descon and other companies in this segment cannot compete with imports without protection for which Descon has approached NTC for anti-dumping duties in the past.
Descon is working towards changing its corporate strategy and moving towards diversification with an improved geographical mix. Its business has also improved in its mining segment which has emerged as the highest growth segment for hydrogen peroxide applications in Pakistan. It is also trying to curtail expenses though with limited success, as indicated by its marginally lower distribution and selling costs as a percentage of sales. As long as its tariff protection is maintained for Descon, it is not likely to be in dire straits significantly.
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Pattern of shareholding (as at June 30, 2017)
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Shares held %
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Directors, Chief Executive Officers, and their spouse and minor c 44,597,250 44%
Associated Companies, undertakings and related parties. (Parent C 17,506,404 17%
NIT and ICP 0%
Banks Development Financial Institutions, Non Banking Financial I 0%
Insurance Companies 0%
Modarabas and Mutual Funds 0%
Share holders holding 10% or more 23,774,950 23%
General Public
a. Local 30,983,346 30%
b. Foreign 500 0%
Others
a. Joint stock companies 3,868,500 4%
b. Leasing companies 7,000 0%
c. Foreign companies 4,815,000 5%
d. Others 222,000 0%
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Source: Company accounts
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Descon oxychem limited
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Rs. (mn) 1HY18 1HY17 YoY
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Sales 953 995 -4%
Costs of sales -708 -699 1%
Gross profit 245 296 -17%
Administrative expenses -40 -36 11%
Distribution and selling costs -34 -36 -6%
Other operating income 8 5 60%
Other expenses -14 -11 27%
Profit from operations 165 220 -25%
Finance cost -2 -9 -78%
Profit before tax 162 210 -23%
Tax -58 -84 -31%
Profit for the period 105 126 -17%
EPS 1.03 1.24 (1700 bps)
Gross profit margin 26% 30% (1400 bps)
Net profit margin 11% 13% (1300 bps)
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Source: Company accounts