Pakistan Oxygen Limited

Pakistan Oxygen Limited (PSX; PAKOXY) was incorporated in Pakistan as a private limited company in 1949 and was converted into a public limited company in 1958. The principal activity of the company is the manufacturing of industrial and medical gases and welding electrodes besides marketing of medical equipment.

Pattern of Shareholding

As of December 31, 2022, PAKOXY has a total of 58.59 million shares outstanding which are held by 1898 shareholders. Associated companies, undertakings and related parties are the largest shareholder of PAKOXY with a stake of 45.5 percent in the company. This category is largely dominated by M/s Adira Capital Holdings (Private) limited, holding 33.2 percent of the company’s shares. After this comes the Local general public accounting for 40.75 percent of PAKOXY’s shares. Directors, CEO, their spouse and minor children hold 7.2 percent of the company’s shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

Except for a marginal cut in 2019, PAKOXY’s topline has seen growth in the subsequent years. The bottomline fell twice – in 2019 and 2022. Gross margin stayed afloat in 2019 and then rode a downward trajectory thereafter. Operating margin has been descending persistently since 2019 while net margin which had also been narrowing down since 2019 saw a marginal uptick in 2021 and then died down in 2022. The detailed performance review of each of the years under consideration is given below.

In 2019, PAKOXY’s topline posted a 4 percent year-on-year slump as policy measures to contain fiscal and current account deficits had pushed the GDP growth down to 3.3 percent with LSM posting a decline of 3.4 percent in FY19 as against the growth of 6.4 percent in FY20. With major customer industries slowing down their activity and with the complete shutdown of the ship breaking sector, PAKOXY’s banked on the oil and gas and medical engineering sectors to soften its sales decline. Cost of sales slid by 4 percent year-on-year in 2019. The in-house manufacturing of electrodes resulted in cost savings for the company which otherwise would be immense due to massive hike in electricity tariffs during the year. The GP margin stayed intact at 22.8 percent in 2019. Higher payroll expense as well as greater allowance booked for expected credit losses in 2019 resulted in a 22 percent year-on-year spike in distribution expense in 2019. Administrative expense also escalated by 8 percent year-on-year in 2019. This culminated into a 13 percent year-on-year drop in operating profit with OP margin sliding down from 13.5 percent in 2018 to 12.2 percent in 2019. Finance cost multiplied by 49 percent year-on-year in 2019 not only because of higher discount rate but also because of the usage of additional credit facilities during the year particularly running finance facilities. Net sales slumped by 25 percent year-on-year in 2019 to clock in at Rs.300.59 million with an NP margin of 6.4 percent versus 8.2 percent in 2018. EPS also dropped from Rs.12.25 in 2018 to Rs.7.70 in 2019.

PAKAOXY’s topline grew by 19 percent year-on-year in 2020. While all the sectors of the economy were under severe pressure due to the sudden outbreak of the novel Corona virus which not only hampered the demand across the board but also created widespread supply chain problems and immensely impacted the routine business activity. In such uncertain scenario, PAKOXY took the apt decision and banked on the healthcare segment which grew by 69 percent during the year. In 2020, the company prioritized oxygen supplies to the healthcare segment and also enhanced its medical engineering portfolio through localization. Cost of sales grew by 22 percent year-on-year in 2020 due to unprecedented increase in electricity tariffs and one-off arrear of Rs.45 million charged by K-Electric on the withdrawal of Industrial Support Package (ISPA) in 2020. As a consequence, GP margin inched down to 19.9 percent in 2020. In the absence of allowance booked for ECL, distribution expense tumbled by 2 percent year-on-year in 2020. Conversely, administrative expense rose by 10 percent year-on-year in 2020. Other income posted a hefty 131 percent growth in 2020 on account of insurance claims worth Rs.50 million due to failure of motor at one of the company’s ASU plants. Operating profit grew by 8 percent year-on-year in 2020, however, OP margin eroded to stand at 11.1 percent. Finance cost shrank by 5 percent year-on-year in 2020 due to rate cuts and also because of better cash flow and liquidity management. The result was a 15 percent year-on-year improvement in PAKOXY’s net profit which clocked in at Rs.346.28 million in 2020 with an NP margin of 6.2 percent and an EPS of Rs.7.39. EPS dropped by 4 percent despite bottomline growth due to the issuance of 20 percent bonus shares in 2020.

2021 witnessed the highest topline and bottomline growth among all the years under consideration. PAKOXY’s net sales grew by 26 percent year-on-year in 2021 which was backed by robust growth across all the segments i.e. industrial and medical segments, welding portfolio and medical engineering. However, healthcare segment proved to be the major growth driver during the year as COVID-19 wasn’t completely subsided and the company kept providing oxygen to hospitals across the country on priority basis. To make sure that none of its clients is short of oxygen at any point in time, the company introduced an “Emergency Response Center” – an automated stock monitoring and delivery system. The medical engineering segment also continued to impress in 2021 with the creation of 2700 new beds with Oxygen supply system for the treatment of COVID-19 patients. Cost of sales grew by 27 percent year-on-year. Gross profit grew by 23 percent year-on-year in 2021, however, GP margin slightly inched down to 19.4 percent. Distribution and administrative expense grew by 21 percent and 8 percent year-on-year respectively primarily on account of higher sales volume and induction of new employees respectively during the year. Operating profit posted a significant 22 percent jump, however, OP margin contracted to clock in at 10.7 percent in 2021. Finance cost remained in check as it dropped by 27 percent year-on-year in 2021 on account of low discount rate and better working capital management. Net profit grew by 30 percent year-on-year to clock in at Rs.451.10 million with an NP margin of 6.4 percent, slightly higher than last year. EPS grew to Rs.7.70 in 2021, signifying a 4 percent growth due to the issuance of 20 percent bonus shares in 2021.

2022 didn’t fare well for Pakistan’s economy as rising economic and political turmoil took a heavy toll on the business activity. PAKOXY’s sales registered a skimpy 4 percent year-on-year growth mainly driven by Hard goods and medical engineering services and as well as sales of Carbon dioxide to food and beverages segment. 6 percent rise in the cost of sales was driven by higher raw materials cost particularly energy and fuel charges as well as Pak Rupee depreciation. This squeezed the gross profit by 3 percent year-on-year. Gross profit contracted to 18.2 percent in 2022. Distribution and administrative expense grew by 9 percent and 12 percent respectively, well below the inflation level. Operating profit recorded a 9 percent plunge in 2022 with OP margin marching down to 9.4 percent. Finance cost grew by a massive 75 percent year-on-year in 2022 due to policy rate hikes during the year. The result was 7 percent downtick in bottomline to clock in at Rs.420.05 million with an NP margin of 5.8 percent and an EPS of Rs.7.17.

Recent Performance (1HCY23)

During 1HCY23, PAKOXY’s topline slid by 2 percent which was mainly on account of a reduction in the demand of oxygen from steel, glass and ship breaking sectors on account of 14.4 percent year-on-year contraction in LSM. Healthcare and Medical engineering segments also registered lackluster performance during the period. 21 percent year-on-year growth in the welding segment saved the day for PAKOXY and reversed the sales decline from other segments to a great extent. Cost of sales grew by 4 percent despite lackluster sales due to unprecedented rise in diesel and electricity prices. This pushed the gross profit down by 27 percent year-on-year in 1HCY23. GP margin also dipped from 19.9 percent in 1HCY22 to 14.8 percent in 1HCY23. Distribution and administrative expense grew by 15 percent and 12 percent respectively due to high inflation. This chopped down the operating profit by 51 percent year-on-year in 1HCY23 with OP margin sliding from 11.6 percent in 1HCY22 to 5.7 percent in 1HCY23. Finance cost continued to haunt as it spiked by 51 percent year-on-year due to significantly high discount rates. This brought the net profit down by 84 percent year-on-year in 1HCY23 to clock in at Rs.33.69 million with an NP margin of 0.9 percent versus 5.4 percent during the same period last year. EPS also slipped from Rs.2.80 in 1HCY22 to Rs.0.46 in 1HCY23.

Future Outlook

With the steep rise in the cost of doing business and shrunken demand, the economic conditions don’t seem promising in the near future. High inflation, Pak Rupee depreciation and exponentially growing electricity and fuel prices are adding more to the woes and resulting in significant margin erosion. To evade this, the company is planning to fully pass on the impact of cost hike to the consumers by raising the prices across the segments. It has also initiated a 270 TPD ASU plant at Port Qasim which is expected to further improve its margins.