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, 2024, DOL has an outstanding share volume of 175.032 million shares which are held by diverse categories of shareholders. Associated companies, undertaking, and related parties hold 72.63 percent of the total outstanding shares of DOL followed by local general public accounting for 23.80 percent of shares. Joint stock companies have a 2.7 percent stake in the company. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-24)
Except for a dip in 2020 and 2024, DOL’s topline has posted growth in all the years under consideration. Its bottom line slid in 2021 and 2024. 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. In 2024, the margins fell to their lowest level. The detailed performance review of the period under consideration is given below.
In 2019, the topline posted a tremendous year-on-year growth of 29.53 percent to clock in at Rs.2704.96 million. This came on the back of robust local sales. Conversely, 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). Cost of sales also grew by 27.34 percent year-on-year mainly due to the conversion of the industry from local gas to expensive RLNG. Despite the soaring cost of sales, gross profit boasted 34.78 percent year-on-year growth in 2019. 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 the margins on export sales Operating expenses considerably 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 by 22.72 percent 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 by 101 percent on the back of increased provisions 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 43.21 percent year-on-year in 2019 with OP margin clocking in at 24.31 percent up from the OP margin of 22 percent registered in the previous year. Finance cost grew by 1373.70 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 the preference shares. The company’s capital structure which was entirely equity-based for the past 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 22.33 percent year-on-year increase to clock in at Rs.394.27 million in 2019 with EPS of Rs.3.87 versus EPS of Rs.3.16 posted in the previous year. NP margin, however, dropped from 15.43 percent in 2018 to 14.58 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 the lockdown. Nonetheless, DOL’s net sales recorded a dip of 2.34 percent to clock in at Rs. 2641.62 million in 2020. This was on account of price adjustments in line with market demand During the year, the company entered into 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. Reduction in crude oil prices proved to be a great opportunity for the company to lower its cost of sales and improve its GP margin which went up to 32.60 percent in 2020. 34 percent year-on-year rise in distribution cost in 2020 was the consequence of trial fee paid for the product approval in food and beverages segment. Administrative expenses also hiked by 14.69 percent in 2020 due to an increase in the number of employees from 97 in 2019 to 104 in 2020. Other income considerably 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 28.18 percent year-on-year in 2020, 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 1.92 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 settled its outstanding debt 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 6.13 percent in 2020 to clock in at Rs.418.42 million with 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 subsided 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 topline growth of only 6.18 percent year-on-year in 2021 to clock in at Rs.2804.90 million. Cost of sales 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 28.83 percent year-on-year in 2021 with GP margin dropping down to 21.85 percent. Distribution expense surged by 11.65 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 3.31 percent in 2021 due to lower payroll expenses as the workforce was streamlined to 101 employees. Other income grew by 145.55 percent in 2021 on the back of dividend income from short-term investments and exchange gains. Other expenses shrank by 36.34 percent in 2021 on the back of low provisioning done for WWF and WPPF. Operating profit tapered down by 32.47 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 a low discount rate resulted in a 20.55 percent year-on-year decline in finance cost during 2021. The bottom line shrank by 33.39 percent in 2021 to clock in at Rs.278.70 million with 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 posted a stunning topline of Rs.4250.49 million in 2022, up 51.54 percent year-on-year. 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 79.76 percent year-on-year growth in gross profit. Operating expenses grew mainly 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 10.30 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 145.51 percent year-on-year in 2022 on the back of higher provisioning for WWF, WPPF as well as exchange loss made during the year. Operating profit managed to post a tremendous year-on-year rise of 88.90 percent in 2022 with OP margin recorded at 20.12 percent. Finance costs thinned down by 18.74 percent in 2022 due to long-term debt repayments. The debt-to-equity ratio nosedived to 13:87 in 2022. DOL’s bottom line grew by 68.95 percent in 2022 to clock in at Rs.470.88 million with EPS of Rs.2.69 and NP margin of11.08 percent
With the highest topline growth of 58.13 percent year-on-year, 2023 stands out from all other years under consideration. DOL’s net sales stood at Rs.6721.35 million in 2023. While the company didn’t 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 cost, DOL was able to improve its gross profit by 150.17 percent in 2023 with GP margin mounting to 41.01 percent on the back of price progression and scalability of operations. Administrative expenses spiked by 36.67 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 183.84 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 306.26 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 220.51 percent bigger other expenses incurred during the year which was the consequence of higher profit-related provisioning and exchange loss. Operating profit grew by 163.14 percent in 2023 with OP margin rising up 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 197.45 percent in 2023 to clock in at Rs.1400.63 million with EPS of Rs.8 and NP margin of 20.84 percent.
After registering staggering growth in net sales, profitability, and margins in 2022 and 2023, the company’s topline eroded by 15.28 percent year-on-year in 2024 to clock in at Rs5694.09 million. This was on the back of reduced demand and lackluster economic activity within and outside the home country. While export dispatches posted some progress during the year, there was superfluous supply in the regional market due to the dumping of imported products. This didn’t allow the company to implement its pricing strategy. However, it diligently focused on improved product placement. Cost of sales hiked by 15.54 percent year-on-year in 2024 on the back of high global and indigenous inflation, a hike in energy tariffs, and elevated commodity prices due to the Russia-Ukraine crisis. DOL’s gross profit slumped by 59.62 percent year-on-year in 2024 with its GP margin drastically falling down to its lowest level of 19.55 percent. Administrative expenses spiked by 10 percent in 2024 as a consequence of inflationary pressure and an uptick in the workforce from 115 employees in 2023 to 117 employees in 2024. Distribution expense slid by 9.51 percent in 2024 due to lower freight charges and a downtick in fee & subscription charges and royalty paid to Descon (Private) Limited due to common directorship. Other income spiraled by 45.89 percent year-on-year in 2024 on account of higher dividends from investments and excess liability written back during the year. Lesser profit-related provisioning and no exchange loss incurred during the year is the reason behind the 73.25 percent plunge recorded in other expenses in 2024. Operating profit waned by 62.64 percent in 2024 with OP margin contracting to its lowest level of 14.76 percent. Finance costs plummeted by 8.18 percent during the year due to efficient management of the cash conversion cycle and payment of long-term debt. Net profit tumbled by 66.37 percent year-on-year to clock in at Rs.471.039 million with EPS of Rs.2.69 and NP margin of 8.27 percent.
Recent Performance (1HFY25)
During the first half of FY25, DOL’s net sales inched up by 8.81 percent year-on-year to clock in at Rs.3154.99 million. This came on the back of better and higher volume placement as well as an improved pricing strategy implemented during the period. Cost of sales shrank by 6.27 percent in 1HFY25 due to lower repair & maintenance charges and no shutdown expense incurred during the period. This translated into 6a 8.51 percent year-on-year improvement in DOL’s gross profit in 1HFY25 with the GP margin jumping up to 31.23 percent versus the GP margin of 20.17 percent recorded during 1HFY24. Administrative expenses spiked by 14.31 percent during the period under consideration on the back of inflationary pressure. Conversely, distribution expense inched up by just 1.84 percent as export sales eroded during the period. Other income dwindled by 60.95 percent in 1HFY25 apparently due to lower income from financial assets on the back of monetary easing and also because of no liabilities written back during the period, unlike 1HFY24. High profit-related provisioning appears to be the reason for 127.69 percent higher other expenses recorded by DOL in 1HFY25. Operating profit strengthened by 53.45 percent in 1HFY25 with OP margin clocking in at 23.62 percent versus OP margin of 16.75 percent recorded in 1HFY24. Finance cost slid by 62.6 percent in 1HFY25 due to a lower discount rate and also because of zero working capital utilization on the back of good terms of trade. DOL recorded a 72.57 percent year-on-year improvement in its net profit which clocked in at Rs.458.94 million in 1HFY25. This translated into EPS of Rs.2.62 in 1HFY25 versus EPS of Rs.1.52 recorded in 1HFY24. NP margin also climbed up from 9.17 percent in 1HFY24 to 14.55 percent in 1HFY25.
Future Outlook
Penetration into new segments and markets such as sugar treatment and cosmetics applications alongside improvement observed in demand from paper processing, textile, and agriculture sectors will create new avenues of growth and create a hedge against margin erosion.
On the flip side, DOL faces downward pressure from increased energy costs and low prices of hydrogen peroxide in the international market.
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