Octopus Digital Limited

Octopus Digital Limited (PSX: OCTOPUS) was incorporated in Pakistan as a private limited company in 2017 as Avanceon Digital (Private) Limited. The company changed its name to Octopus Digital (Private) Limited in 2019. It was converted into a public limited company in 2020. OCTOPUS is a wholly owned subsidiary of Avanceon Limited. The company is engaged in carrying out IT enabled services which involves information storage, online assessment and monitoring of employee performance, online screening of cost and production efficiency, online plant and machinery maintenance as well as selling and trading of relevant software and equipments.

Pattern of Shareholding

As of December 31, 2023, OCTOPUS has a total of 157.263 million shares outstanding which are held by 6621 shareholders. Avanceon Limited is the largest shareholder of OCTOPUS with a stake of 74.32 percent in the company followed local general public holding 15.07 percent shares of OCTOPUS. Banks, DFIs and NBFIs account for 1.14 percent of the outstanding shares of the company. The remaining shares are held by other categories of shareholders.

Historical Performance (2020-23)

OCTOPUS’s topline and bottomline has been following an upward trajectory since 2020. A sneak into the margins of the company shows that the gross margin followed a persistent downward route from 2019 to 2022 followed by an uptick in 2023. Conversely, operating and net margins greatly picked up in 2020, followed by a significant plunge in 2021. Both the margins registered recovery in 2022 followed by a downtick in 2023 (see the graph of profitability ratios). The detailed performance review of each of the period under consideration is given below.

In 2020, OCTOPUS’s topline multiplied by 1401.45 percent to clock in at Rs.277.11 million. This was the year when the company entered into a contract with Avanceon Limited (the holding company) under which OCTOPUS acquired the After Market Support (AMS) segment of Avanceon by issuing 108.4 million ordinary shares of the company at a face value of Rs.10 per share. In the same year, OCTOPUS also changed its status from being private limited company to public limited company. The spike in sales revenue was the result of AMS segment’s revenue worth Rs.241.242 million transferred to OCTOPUS by Avanceon after deducting an administrative fee. OCTOPUS didn’t incur any cost of sales in 2019, however, the same grew to Rs.7.75 million in 2020 mainly on account of materials consumed during the year. This translated into GP margin of 97.2 percent in 2020. Operating expense grew by 12.34 percent year-on-year in 2020 primarily due to higher payroll expense as the number of employees increased from 4 in 2019 to 21 in 2020. Operating profit grew by 5336.76 percent in 2020 with OP margin of 91.57 percent versus OP margin of 25.3 percent recorded in 2019. With 0 percent debt-to-equity ratio, the company didn’t have any finance cost on its books. Net profit grew by 8874.13 percent in 2020 to clock in at Rs.219.74 million with NP margin of 79.30 percent versus NP margin of 13.27 percent recorded in 2019. EPS shrank by 17.96 percent year-on-year in 2020 to clock in at Rs.2.01 due to issuance of shares during the year.

In 2021, OCTOPUS’s topline grew by 125.61 percent year-on-year which was mainly led by 11.16 times rise in export sales during the year. Local sales and services also multiplied by 2.3 times in 2021. Cost of sales grew by 1860 percent in 2021 primarily on the back of installation and travelling charges incurred related to engineering services coupled with materials consumed during the year and back office support provided by the holding company. This translated into 75.68 percent escalation in gross profit in 2021, however, GP margin slumped to 75.7 percent. Operating expense grew by 705.46 in 2021 mainly due to massive allowance worth Rs.58.068 million booked against ECL. During 2021, OCTOPUS also earned exchange gain and profit of TDR, translating into other income of Rs.11.14 million. Operating profit grew by 42 percent year-on-year in 2021 with OP margin slipping to 57.65 percent. Net profit registered 57.44 percent year-on-year growth in 2021 to clock in at Rs.345.95 million with NP margin of 55.33 percent and EPS of Rs.2.53.

In 2022, OCTOPUS’s topline posted 9.89 percent year-on-year growth. Due to import restrictions, the company AMS’s revenue particularly to spare and material oriented projects remained low during the year. Cost of sales grew by a steep 103.59 percent due to Pak Rupee depreciation and high inflation. Gross profit slipped by 20.21 percent year-on-year in 2022 with GP margin narrowing down to 54.96 percent. Operating expense grew by 64.5 percent year-on-year mainly on account of elevated payroll expense as the number of employees grew from 27 in 2021 to 46 in 2022. Management fee, bank charges and allowance for ECL also significantly grew in 2022. Operating results were greatly buttressed by a massive 2202.94 percent spike in other income in 2022 which was the consequence of exchange gain on its foreign sales as well as mark-up income from the parent company. Operating profit grew by 19.34 percent year-on-year in 2022 and OP margin also rebounded to clock in at 62.61 percent in 2022. Net profit rose by 17 percent year-on-year in 2022 to clock in at Rs.405.063 million with NP margin of 58.96 percent and EPS of Rs.2.74.

In 2023, OCTOPUS’s net sales rose by 31.46 percent. This was mainly on account of revenue from export sales and AMS business services rendered during the year. Cost of sales hiked by 28.52 percent year-on-year in 2023 primarily on the back of elevated installation charges related to engineering services. However, hefty export sales resulted in 33.87 percent year-on-year rise in gross profit in 2023 with GP margin inching up to 55.97 percent. OCTOPUS registered 53.99 percent higher operating expense in 2023 which was due to increased payroll expense as the company enhanced its workforce to 85 employees, up from 57 employees in the previous year. Allowance for ECL pertaining to related parties as well as legal & professional charges also surged during the year, making significant contribution to higher operating expense in 2023. Other income mounted by 29.8 percent in 2023 on account of robust exchange gain recorded during the year as well as elevated mark-up income earned from related parties. OCTOPUS’s operating profit improved by 21.94 percent in 2023, however, OP margin ticked down to 58.08 percent due to elevated operating expense. During the year, OCTOPUS obtained long-term loan of Rs.14.418 million which resulted in finance cost of Rs.1.5 million during the year. Net profit improved by 27.34 percent year-on-year in 2023 to clock in at Rs.515.808 million with EPS of Rs.3.45 and NP margin of 57.11 percent.

Recent Performance (1QCY24)

During 1QCY24, OCTOPUS recorded 132 percent year-on-year despite the fact that Pak Rupee exhibited stability against the greenback. This signifies that the topline growth wasn’t merely the result of translation gain but hardcore business enhancement. The acquisition of Empiric AI (Private Limited) and the incorporation of a wholly owned subsidiary in UAE, Octopus Digital FZ-LLC might also have contributed in achieving staggering revenue growth during the period. OCTOPUS’s gross profit grew by 151.82 percent in 1QCY24 which translated into GP margin of 54.3 percent against GP margin of 50.1 percent recorded in the previous year. Operating expense surged by 93.28 percent during the period under consideration which was mainly attributable to hiring to hiring of senior sales and technical team during the period. Other income drastically fell to the tune of 99.75 percent during 1QCY24 due to the absence of exchange gain due to resilience witnessed by Pak Rupee. Massive drop in other income resulted in 80.78 percent decline in operating profit in 1QCY24 with OP margin steeply falling down to 23 percent from OP margin of 277.9 percent recorded in 1QCY23. Net profit also registered a plunge of 83.77 percent in 1QCY24 to clock in at Rs.39.49 million with EPS of Rs.0.26 versus EPS of Rs.1.64 recorded in 1QCY23. NP margin also sank from 257.5 percent in 1QCY23 to 18 percent in 1QCY24.

Future Outlook

OCTOPUS is banking on its digitalization business which is making greater strides in the Middle East, US and many other parts of the world. OCTOPUS is constantly expanding its footprint in diverse geographical markets to offset the impact of sluggish business in the home market. The company is also expanding its aftermarket support (AMS) business in KSA to make the most of the region’s thriving business environment.