Sitara Peroxide Limited

Sitara Peroxide Limited (PSX: SPL) is a venture of the Sitara Group. It was set up in 2004 as a public limited company under the Companies Ordinance, 1984. The company manufactures and sells hydrogen peroxide. A key consumer of hydrogen peroxide is the textile sector.

Shareholding pattern

As at June 30, 2020, over 37 percent shares are owned by the directors, CEO, their spouses and minor children. Of this nearly 32 percent shares are held by Mr. Imran Ghafoor, the CEO of Sitara Peroxide Limited. Over 40 percent shares are with the local general public, followed by 11 percent in joint stock companies and another 7 percent in modarabas. The remaining 5 percent shares are distributed with the rest of the shareholder categories.

Historical operational performance

The company’s topline and profit margins have been fluctuating over the years.

In FY17, Sitara Peroxide Limited witnessed one of the largest declines in revenue, by 19 percent. This was primarily attributed to a drop in capacity utilization that also meant lower volumes were sold. The drop in capacity utilization was a result of technical issues in its production facility; capacity utilization in the first half of the year was around 60 percent, while overall it was recorded at 70 percent, compared to over 80 percent in the preceding year. As a result, the company had to import catalyst, filters and raw materials that also had an impact of the cash flow of the company and hence the ability to make payments on its long-term loan. Coupled with this, was the poor performance of the textile sector that also indirectly affected the chemical sector. Collectively, this adversely affected the profitability of the company, that incurred a loss of Rs 87 million and saw its gross margin reaching an all-time low of 4 percent.

Although capacity utilization was still at 70 percent in FY18, revenue was higher by nearly 25 percent during the year. This was mostly attributed to an improvement in the sale price of the Hydrogen Peroxide, particularly in the second half of the year. This helped to raise gross margin to 11.5 percent. The effect also trickled down to the operating margin that was also supported by higher other income that was generated primarily through sale of catalyst. The lower capacity utilization continued to affect profit margins as the company posted a loss of Rs 65 million, although it was lower than that seen last year.

In FY19, revenue increased by a significant 54 percent, crossing Rs 2 billion mark. This was attributed to the recovery in capacity utilization that jumped to over 84 percent during the year. This resulted in an 18 percent gain in sales volumes, whereas prices for hydrogen peroxide were also higher. This allowed gross margin to improve to 26 percent, the highest seen since FY11. Moreover, bottomline was also supported by other income and an overall decline in costs. Other income primarily came from sale of catalyst. Thus, the company posted a relatively healthy net margin of 10 percent.

After increasing for two consecutive years, revenue contracted again in FY20, by over 14 percent that was largely a volumetric decline as prices remained more or less stable. This was reflected in the lower capacity utilization, recorded at 78 percent. This was due to the lock down as a result of the outbreak of the Covid-19 pandemic. However, in order to make up for the reduced demand since the textile industry was also in relation to Covid-19, the company launched a new product with the name “Sitara Safe”- a surface disinfectant and sterilization. However, this could not entirely cover the loss in revenue, therefore gross margin was recorded at a lower 18.5 percent, that also trickled down to the bottomline of Rs 74 million, compared to Rs 207 million seen in the preceding year.

Quarterly results and future outlook

Revenue during the first quarter of FY21 was higher by 44 percent year on year due to a volumetric gain as demand from the textile sector picked up; there was also a big inventory carry over from the preceding year FY20. Profitability was also significantly better year on year- 8.9 percent in 1QFY21 compared to 1.2 percent 1QFY20. This was due to lower RLNG and power tariff.

The second quarter of FY21 saw revenue lower from the previous quarter as well as year on year. However, profitability was better due to lower cost of production, both compared to 1QFY21 and same period last year. Capacity utilization for the six months was also improved to 80 percent.

The third quarter of FY21 saw even lower sales compared to the previous two quarters as well as the same period last year. Cost of production also went up for the period as foreseen, due to rise in oil prices and RLNG prices in the international market that had an effect on cost of chemicals and packing materials imported. However, collectively, the nine months of FY21 performed better with a profit of Rs 121 million compared to a loss of Rs 9 million in 9MFY20.

Given the higher consumption in the textile sector, and the management efforts to enhance plant capacity, the company foresees rising demand for hydrogen peroxide.