Descon Oxychem Limited

Descon Oxychem Limited (PSX: DOL) was incorporated in Pakistan as a private limited company in 2004 and then changed its status into a public limited company in 2008 under the approval of SECP. The principal activity of the company is the procurement, manufacturing, and sale of hydrogen peroxide and its related products.

Pattern of Shareholding

As of June 30, 2023, DOL has an outstanding share volume of 175.031 million shares which are held by 4836 shareholders. Associated companies, undertaking, and related parties hold 72.63 percent of the total outstanding shares of DOL to be classified as the largest shareholder followed by local general public accounting for 20.47 percent of shares. Modarabas & Mutual funds hold 2.52 percent shares while joint stock companies have a 2.22 percent stake in the company. Around 1.08 percent of DOL’s shares are held by Banks, DFIs and NBFIs. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a dip in 2020, DOL’s topline has been growing in all the years under consideration. Conversely, its bottom line slid in 2021. DOL’s margins largely rode an upward trajectory until 2020 followed by a drastic fall in 2021. In the subsequent years, the margins regained their momentum and reached their optimum high level in 2023. The detailed performance of the period under consideration is given below.

In 2019, the topline posted a tremendous year-on-year growth of 29.5 percent which came on the back of robust local sales while export sales plummeted during the year. Off-take of Hydrogen peroxide fell by 7.38 percent in 2019 while trading general sales rebounded by 35 percent in 2019 (see the graph of sales volume). The cost of sales also grew by 27.3 percent year-on-year due to the conversion of the industry from local gas to RLNG. Despite soaring cost of sales, gross profit boasted 34.8 percent year-on-year growth and GP margin also ticked up from 29.52 percent in 2018 to 30.71 percent in 2019. This was the result of upward price revision as well as Pak Rupee depreciation which increased margins of export sales Operating expenses dropped during the year due to the classification of a certain amount of freight and forwarding as cost of sales under IFRS 15. Other income plunged during the year owing to a drop in reversal of loss allowance for doubtful debt coupled with the absence of a net gain on insurance claims of assets written off. Conversely, other expenses rose on the back of increased provision for WWF and WPFF due to improved profitability during the year combined with impairment loss recognized during the year on the assets that are no longer expected to be used by the company. Operating profit mounted by 43.2 percent year-on-year in 2019 with an OP margin of 24.31 percent up from 22 percent in the previous year. Finance cost grew by over 1373.7 percent in 2019 not only because of an increase in discount rate during the year but also due to intercompany borrowings of Rs.1100 million to redeem preference shares. The company’s capital structure which was entirely equity-based for two years recorded a debt-to-equity ratio of 53:47 in 2019. Despite a huge turnaround in the capital structure of DOL which magnified its finance cost manifold, net profit managed to muster a 22.3 percent year-on-year increase to clock in at Rs.394.27 million in 2019 with EPS of Rs.3.87 versus Rs.3.16 in the previous year. NP margin, however, dropped from 15.43 percent in 2018 to 14.6 percent in 2019.

In 2020, amidst the outbreak of the global pandemic, the company made a well-timed decision to launch its multi-purpose sanitizer and disinfectant, Sanidol which buttressed DOL’s revenue despite a lockdown that would have otherwise marred the performance of the company. During 2020, the company entered a commercial partnership with Tetra Pak Pakistan which made Aseptox 35 used to disinfect food and beverages packaging. Sales volume of Hydrogen peroxide increased by 3.14 percent while trading general sales dropped by 34.64 percent in 2020. DOL’s topline slid by 2 percent year-on-year on account of price adjustments in line with the market demand. Reduction in crude oil prices proved to be a fantastic opportunity for the company to lower its cost of sales and improve its GP margin which went up to 32.6 percent in 2020. 34 percent rise in distribution cost was the consequence of the trial fee paid for the product approval in the food and beverages segment. Administrative expenses also hiked by 14.7 percent in 2020 due to an increase in the number of employees from 97 in 2019 to 104 in 2020. Other income shrank during the year due to less interest on bank deposits as well as no reversals on loss allowance for doubtful debts made during the year. Other expenses turned out to be favorable and plummeted by 28 percent year-on-year, particularly on the back of no impairment loss made and no provisions booked against long outstanding advances during the year. Operating profit rose by a meager 1.9 percent in 2020 while OP margin climbed up to 25.37 percent. Finance costs ticked up marginally by 2.8 percent on the back of a high discount rate in the initial quarters of 2020. The company significantly reduced its debt portfolio during the year which culminated in a debt-to-equity ratio of 10:90. The intercompany borrowings were settled by issuing shares to Descon Engineering Limited. DOL’s bottom line posted year-on-year growth of 6.1 percent year-on-year in 2020 to clock in at Rs.418.42 million in 2020 with an EPS of Rs.3.42. The decline in EPS is due to an increase in the number of shares during the year. NP margin rose to 15.84 percent in 2020.

The signs of COVID-19 were not completely over in 2021 yet DOL managed to attain improvement in its off-take during the year. However, the reduction in prices due to COVID-19 resulted in a topline growth of only 6 percent year-on-year in 2021. Cost of production posted a sharp rise of 23.1 percent year-on-year in 2021 on the back of depreciation expense due to capacity expansion, shutdown expense, and an increase in utility charges. This trimmed down the gross profit by 28.8 percent year-on-year in 2021 with GP margin dropping down to 21.85 percent. Distribution expense surged by 11.6 percent in 2021 on the back of Royalty paid to Descon Private Limited for common directorship coupled with loss allowance for doubtful debt booked during the year. Administrative expenses marched down by 3.3 percent in 2021 due to lower payroll expenses as the workforce was streamlined to 101 employees. Other income grew by 145.5 percent on the back of dividend income from short-term investments and exchange gains. Other expenses shrank by 36 percent on the back of low provisions for WWF and WPPF. Operating profit tapered down by 32.5 percent during the year with OP margin slipping to 16.14 percent. The debt-to-equity ratio of DOL moved to 35:65 during the year as the company availed a syndicate finance facility to finance its capacity expansion project. However, efficient working capital management and improved cost of debt on account of the low discount rate resulted in a 20.5 percent year-on-year decline in the finance cost during 2021. The bottom line shrank by 33 percent in 2021 to clock in at Rs.278.70 million with an EPS of Rs.1.59. NP margin narrowed down to 9.94 percent in 2021.

The capacity expansion undertaken by the company in 2021 started bearing fruit as the company made a stunning topline growth of 51.5 percent year-on-year in 2022. The improved sales were the result of higher production, better pricing, and enhanced product placement. The capacity expansion blessed the company with economies of scale which improved its GP margin to 25.92 percent in 2022 with a spectacular 79.8 percent year-on-year growth in gross profit. Operating expenses grew on the back of increased salaries and wages expenses due to an additional workforce hired for increased production capacity coupled with high freight and forwarding expenses, royalty expenses, fees, and subscriptions as well as assets written off during 2022. Other income grew by 10.3 percent in 2022 on the back of the write-off of liabilities, higher profit on bank deposits, and greater scrap sales made during the year. Other expenses grew by 145.5 percent year-on-year in 2022 on the back of WWF, WPPF as well as exchange loss made during the year. Operating profit still managed to post a tremendous year-on-year rise of 88.9 percent in 2022 with an OP margin of 20.12 percent. Finance costs thinned down by 18.7 percent due to long-term debt repayments. The debt-to-equity ratio nosedived to 13:87 in 2022. The bottom line grew by 69 percent in 2022 to clock in at Rs.470.88 million with EPS of Rs.2.69 and NP margin of 11.08 percent.

With topline growth of 58.1 percent year-on-year, 2023 stands out from all other years. While the company did not make any trading general sales during the year, hydrogen peroxide sales rebounded by 3.9 percent in 2023 to clock in at 42,131 MT. Despite unfavorable movement in gas and packing material costs, DOL was able to improve its gross profit by 150 percent in 2023 with a GP margin amounting to 41.01 percent on the back of price progression and scalability of operations. Administrative expenses spiked by 36.7 percent in 2023 on account of higher payroll expenses in line with inflation. The workforce expanded by just two employees to clock in at 115 employees at the end of 2023. Distribution expenses escalated by 183.8 percent in 2023 due to increased salaries, freight & forwarding, fees & subscriptions, royalty as well as elevated traveling and advertisement expenses. Other income grew by a hefty 306.3 percent in 2023 due to higher profit on bank deposits and sizeable dividends earned on short-term investments. However, other income was conveniently gobbled up by 220.5 percent bigger other expenses incurred during the year which was the consequence of higher profit-related provisioning and exchange loss. Operating profit grew by 163 percent in 2023 with OP margin rising to 33.47 percent. Despite the high discount rate, finance costs shrank by 50.7 percent in 2023 due to efficient working capital management, long-term debt repayments, and DOL’s ability to hedge against interest rate hikes. The company’s debt-to-equity ratio was squeezed to 5:95 in 2023. Net profit magnified by 197.5 percent in 2023 to clock in at Rs.1400.63 million with EPS of Rs.8 and NP margin of 20.84 percent.

Recent Performance (1HFY24)

After registering staggering growth in net sales, profitability, and margins in 2022 and 2023, the ongoing fiscal year does not look favorable for DOL. During 1HFY24, the company’s topline eroded by 16.7 percent year-on-year. This was on the back of reduced demand due to lackluster economic activity within and outside the home country. Superfluous supply in the regional market did not allow the company to implement its pricing strategy. Cost of sales hiked by 27.6 percent year-on-year in 1HFY24 on the back of global and indigenous inflation, a hike in energy tariff, and elevated commodity prices due to the Russia-Ukraine crisis. DOL’s gross profit slumped by 65 percent year-on-year in 1HFY24 with its GP margin falling to 20.17 percent, down from 47.92 percent during the same period last year. Administrative expenses spiked by 32.9 percent in 1HFY24 because of inflationary pressure. Distribution expenses also mounted by 16.4 percent during the period under consideration due to high freight charges. Other income spiraled by 214.6 percent year-on-year in 1HFY24 on account of higher profit on its financial assets. Lesser profit-related provisioning is the cause behind the 64.7 percent plunge in other expenses in 1HFY24. Operating profit waned by 66.6 percent during 1HFY24 with OP margin contracting to 16.75 percent versus 41.71 percent during 1HFY23. Finance costs plummeted by 4.3 percent during the period due to efficient management of the cash conversion cycle. Net profit tumbled by 73.6 percent year-on-year in 1HFY24 to clock in at Rs.265.95 million with EPS of Rs.1.52 versus EPS of Rs.5.76 in 1HFY23. The NP margin also drastically fell from 28.94 percent in 1HFY23 to 9.17 percent in 1HFY24.

Future Outlook

Penetration into new segments and markets alongside improvement observed in demand from the Textile and agriculture sectors will create new avenues of growth and create a hedge against margin erosion.