Dynea Pakistan Limited (PSX: DYNO) was incorporated in Pakistan as a public limited company in 1982. The principal activity of the company is the manufacturing and sale of formaldehyde, urea/ melamine formaldehyde and moulding compound.
Pattern of Shareholding
As of June 30, 2022, DYNO had a total of 18.87 million shares outstanding which are held by 1437 shareholders. Foreign investors form the largest shareholding category of DYNO with a stake of 25.75 percent in the company. This is followed by AICA Asia Pacific holding Pvt. Limited, a related party of DYNO, holding 24.99 percent shares. Local individuals account for 24.83 percent of the outstanding shares of DYNO followed by Mutual funds with 14.01 percent shares. Joint stock companies hold 7.28 percent shares of DYNO while Banks, DFIs and NBFIs hold 2.19 percent shares. The remaining shares are held by other categories of shareholders.
Historical Performance (2018-22)
Since 2018, DYNO’s topline dipped only once in 2020, yet its bottomline posted a plunge twice i.e. in 2019 and 2022. DYNO’s margin nosedived in 2019 and then recovered for the two successive years before slipping again in 2022. The detailed performance review of each of the years under consideration is given below.
In 2019, DYNO’s net revenue posted a 33 percent year-on-year rise. This was on account of a 15.21 percent growth in the turnover of resin division and a 56.05 percent growth in the turnover of moulding compound division. In line with a demand drop, the resin division of the company operated at 59 percent capacity in 2019 versus 60 percent capacity utilization recorded in 2018. Conversely, the actual production of moulding compound division stood at 110 percent of the rated capacity in 2019 versus 87 percent capacity utilization recorded in 2018. Steep depreciation of Pak Rupee and rise in raw material and energy prices pushed the cost of sales up by 40 percent during the year. While gross profit recorded in 2019 was 2 percent higher than that in 2018; GP margin tumbled from 17.8 percent in 2018 to 13.6 percent in 2019. Distribution expense dropped by 8 percent year-on-year in 2019 on account of lower freight charges as well as significantly curtailed sales promotion expense. Conversely, administrative expense grew by 19 percent year-on-year in 2019 which was the result of higher payroll expense caused by high inflation. Operating profit posted a 3 percent decline in 2019 translating into an OP margin of 7.7 percent versus 10.6 percent in 2018.
Finance cost posted a staggering 160 percent growth in 2019 due to high discount rate. All these factors resulted in net profit shrinking by 23 percent year-on-year in 2019 to clock in at Rs.226.90 million. DYNO recorded an NP margin of 4.4 percent in 2019 versus 7.6 percent recorded in 2018. EPS also slid from Rs.15.63 in 2018 to Rs.12.02 in 2019.
In 2020, DYNO’s topline registered a 13 percent year-on-year decline. Owing to the deceleration of economic activity due to COVID-19, construction and allied industries also came to a standstill. Consequently, the turnover of both resin and moulding compound division nosedived by 22.7 percent and 3.14 percent respectively in 2020. Weak demand was also evident in the capacity utilization of both the plants of DYNO. In 2020, resin segment operated on a 47.5 percent capacity versus 59 percent in 2019 while moulding compound division operated on 99 percent capacity versus 110 percent in 2019. Cost of sales dropped by 16 percent year-on-year which drove the gross profit up by 12 percent year-on-year in 2020. GP margin also grew to 17.4 percent during the year. Lower cartage and freight charges on account of a drop in sales volume translated into a 9 percent year-on-year dip in distribution expense. Conversely, administrative expense remained constant during the year. During the year, DYNO also booked a provision of Rs.95.59 million against expected credit losses (ECL). This was due to depressed economic activity which increased the probability of non payments on trade debts. The provision against ECL booked in 2020 was around 7 times higher than the provision booked in 2018. Cost optimization and operational efficiency enabled DYNO to attain a 5 percent higher operating profit and an OP margin of 9.3 percent despite depressed sales in 2020. Finance cost also buttressed the bottomline as it dwindled by 23 percent year-on-year in 2020 which was the consequence of a significant reduction in borrowings. Net profit rose by 12 percent year-on-year in 2020 to clock in at Rs.253.35 million with an NP margin of 5.6 percent and an EPS of Rs.13.42.
2021 appears to be the rejuvenating year for DYNO where it recovered from the scars of the previous year by posting a robust 52 percent year-on-year growth. Both resin and moulding compound division posted a rebound in the net revenue to the tune of 39.03 percent and 61.63 percent respectively in 2021. During the year, the company also increased its moulding compound capacity from 20,000 MT in 2020 to 35,000 MT in 2021 and operated at 89 percent capacity. Resin plant also operated at an enhanced capacity of 68 percent in 2021 to meet the rising demand which was the result of recovery in the construction and allied industries. Cost of sales grew by 40 percent year-on-year, resulting in a 109 percent growth in gross profit in 2021. GP margin posted its optimum value of 24 percent in 2021. Higher payroll expense due to an increase in the size of the workforce to make-up for the moulding compound segment’s expansion resulted in a 32 percent year-on-year hike in administrative expense in 2021. Distribution expense also posted a 39 percent year-on-year spike on account of higher cartage and freight charges. As against previous years, in 2021, the company booked reversals of Rs.111.31 million against ECL. Some noticeable movement was also observed in the other expense and other income account in 2021. Other expense grew by 160 percent year-on-year to stand at 1.4 percent of the net revenue in 2021 as against 0.8 percent in the previous year. This was due to massive provisioning against WWF and WPPF booked during the year. Other income also grew by 285 percent year-on-year to stand at 0.5 percent of DYNO’s net sales in 2021 as against 0.2 percent in 2020. This was primarily on account of profit on saving accounts as well as exchange gain. Operating profit grew by 225 percent year-on-year in 2021 with OP margin touching a new height of 19.8 percent. Finance cost slid by 56 percent year-on-year in 2021 due to lower discount rate and lower external financing obtained during the year. Net profit multiplied by 270 percent year-on-year in 2021 to clock in at Rs.938.61 million with an NP margin of 13.7 percent and an EPS of Rs.49.73.
The growth trajectory continued in 2022 with 40 percent year-on-year growth in topline. This was backed by a 58 percent year-on-year growth in the turnover of resin division and a 28 percent year-on-year growth in the turnover of moulding compound division.
To meet the growing demand, the company increased the capacity of resin division from 186,000 MT to 196,000 and operated at 65 percent capacity. Moulding compound division also witnessed a capacity enhancement from 35,000 MT to 41,000 MT with a capacity utilization of 81.78 percent recorded during the year. 2022 came with its own baggage of challenges whereby not only did the prices of raw materials hiked in the international market, Pak Rupee depreciation made the matters even worse. To top it off import restrictions were imposed due to dwindling foreign exchange reserves of the country. High local inflation, energy price hikes as well as high discount rate and taxation greatly suppressed the business sentiments. Cost of sales grew by 53 percent year-on-year, pushing the gross profit down by 2 percent in 2022. GP margin also slipped to 16.9 percent in 2022 from 24 percent in the previous year. Distribution and administrative expense grew by 30 percent and 20 percent respectively in 2022 not only because of an expansion in the size of business and yearly off-take but also on account of unprecedented level of inflation. Operating profit shrank by 22 percent year-on-year in 2022 with OP margin ticking down to 11 percent. Despite lesser borrowings, high discount rate resulted in a 60 percent hike in finance cost. This pushed the net profit down by 34 percent year-on-year to clock in at Rs.621.50 million in 2022 with an NP margin of 6.5 percent and an EPS of Rs.32.93.
Recent Performance (9MFY23)
During 9MFY23, DYNO’s net sales grew by 15 percent year-on-year coming on the back of a 3.4 percent rise in the turnover of resin division and 25.3 percent growth in the turnover of moulding compound division during the period. High cost of sales didn’t allow the topline growth to trickle down and pushed the gross profit down by 2 percent year-on-year in 9MFY23. GP margin marched down from 18.9 percent in 9MFY22 to 16 percent in 9MFY23. Operating expense grew by 36 percent year-on-year in 9MFY23 resulting in a 27 percent year-on-year drop in operating profit. OP margin slipped from 13.6 percent in 9MFY22 to 8.7 percent in 9MFY23. Finance cost multiplied by 141 percent year-on-year in 9MFY23 on account of short-term financing obtained during the period which the company didn’t obtain since 2020. This squeezed the net profit by 35 percent year-on-year in 9MFY23 to clock in at Rs.444.96 million. EPS plunged from Rs.36.55 in 9MFY22 to Rs.23.58 in 9MFY23. NP margin also tapered from 9.5 percent in 9MFY22 to 5.3 percent in 9MFY23.
Future Outlook
Volatile business environment and political chaos has not only reduced the market size of DYNO by squeezing the purchasing power of consumers but has also taken heavy toll on the cost of doing business. While the import restrictions have been eased, the freefall of Pak Rupee and an unabated hike in the raw material prices seem to show no respite in the coming times. Then rise in energy tariff, high interest rate and additional taxes imposed will also continue to play their part in keeping the margins and bottomline frail.
With the country already grappling against a monstrous fiscal deficit, any significant rise in PSDP spending seems like a far-fetched dream.
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