Descon Oxychem Limited

Descon Oxychem Limited (PSX: DOL) was established as a private limited company in 2004 under the Companies Ordinance, 1984. The company manufactures, procures, and sells hydrogen peroxide and allied products that are used in mining, textile and food and beverage industries. In addition to catering to the local market, the company also exports, particularly the Middle East.

Shareholding pattern

As at June 30, 2021, nearly 73 percent shares are held under the associated companies, undertakings and related parties within which two major shareholders are DEL Chemicals (Private) Limited and Descon Engineering Limited. The local general public owns over 21 percent shares, while the directors, CEO, their spouses and minor children own less than 1 percent share. The remaining about 6 percent shares are with the rest of the shareholder categories.

Historical operational performance

Topline for the company has been fluctuating, whereas profit margins in the last six years have risen between FY16 and FY20, before sliding in FY21.

In FY18, revenue grew by 6.5 percent to cross Rs 2 billion in value terms attributed to a pricing initiative. On the other hand, production cost fell to 70.5 percent of revenue, which was the lowest seen since FY12. As a result, gross margin improved to 29.5 percent. With higher other income due to “reversal of provision for doubtful debt” and “others”, coupled with finance expense halving year on year in value terms, net margin was recorded at its highest thus far at 15.4 percent.

In FY19, the company witnessed the largest growth in revenue at over 29 percent to reach Rs 2.7 billion. As PKR devalued against US dollar, exports from the country became favourable in the international market, resulting in an improvement in topline; with production cost reducing, albeit marginally, to 69.3 percent of revenue, gross margin also inclined by a similar extent, to 30.7 percent. Operating margin saw a relatively higher increase at 24.3 percent, up from last year’s almost 22 percent. This was due to a reduction in operating expenses overall, particularly the distribution and selling expenses. The latter was a result of “adoption of IFRS 15, ‘Revenue from Contracts with Customers’”. However, net margin was recorded at a lower 14.57 percent as both, finance and tax expense increased. The rise in finance expense was attributed to “intercompany borrowing for redemption of preference shares”. But in value terms, bottomline was higher at Rs 394 million compared to Rs 322 million in FY18.

Topline in FY20 contracted by 2.3 percent. This was attributed to lower sales volumes in addition to price playing its role. Yet the company managed to post a higher gross margin at 32.6 percent, as production cost reduced to consume 67.4 percent. With little changes in other elements, this also reflected in the net margin that was recorded at an all-time high of 15.8 percent. Due to the outbreak of Covid-19, several companies suffered a loss in revenue due to a change in consumer spending habits; however, Descon Oxychem was able to avoid a major contraction in revenue as it introduced a disinfectant and sanitizer that was seeing a surging demand.

Revenue bounced back in FY21 somewhat as it recorded a growth of 6 percent to reach an all-time high of Rs 2.8 billion. This was primarily attributed to an improvement in sales volumes and pricing was adversely affected due to Covid-19 pandemic. During the period, the company completed its expansion project that resulted in a 25 percent increase in production capacity. However, this also incurred a depreciation expense of Rs 120 million, coupled with shut down expenses and increase in utility prices that caused production cost to rise to 78 percent of revenue. Therefore, gross margin shrunk to almost 22 percent, while net margin fell significantly to almost 10 percent for the year.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 27 percent year on year. During the month of August, the company recorded its highest production and sales levels achieved in a month. Combined with this was the recovery of H2O2 prices in the international market that resulted in an improved topline. With a marginal reduction in production cost, gross margin was also slightly better at 11.3 percent versus 10.3 percent. This also trickled to the net margin that was slightly better at 2.8 percent (1QFY21: 2.2 percent).

The second quarter saw revenue higher by 61 percent year on year as sales volumes increased by 29 percent. Coupled with notable curtailment of production cost, net margin was also improved at almost 21 percent compared to 12.9 percent in the same period last year.

The third quarter saw topline higher by nearly 24 percent year on year as it continued to reap the benefits of a higher production capacity and thus the ability to cater to the growing demand. But with an exorbitant rise in production cost to over 90 percent of revenue, compared to over 68 percent in 3QFY21, profitability shrunk significantly as net margin was recorded at 2.6 percent versus 16.5 percent in 3QFY21. With rising demand and the company’s efforts to enter new segments and markets, the topline has been rising, but with the rise in production cost, as is seen in the third quarter, future profitability is uncertain.