A market leader in Pakistan's hydrogen peroxide market, Descon Oxychem (DOL on PSX) was established in 2008. It supplies customised chemistries for textiles, food & beverage safety, and industrial and consumer markets. It is also exploring growth in international markets for pulp & paper, cosmetics, and electronics manufacturing. It is part of the Descon Engineering's chemical line of business.
Industry overview The bleaching properties of hydrogen peroxide are used in many industries. Globally, the hydrogen peroxide market is about 4.6 million tons and contributes from 12 to 15 percent in worldwide chemical industry revenues. Textiles, pulp & paper, and semi-conductor industry are the major components of hydrogen peroxide applications and are expected to influence demand for peroxide over the next 10 years.
Hydrogen peroxide is particularly effective for the bleaching of natural fibers, but can also be used, under certain conditions, for the bleaching of synthetic fibers. Its bleaching improves the consistency of dye transfer to the fabric. Cotton bleached with hydrogen peroxide has a stable whiteness, a soft touch and an absorbency that improves the dyeing of the fabric. In Pakistan, hydrogen peroxide is used primarily in the textile sector since the country is not a major producer of high-grade paper which uses hydrogen peroxide as its input.
Operational and historical overview
Operationally, Descon brought down production losses significantly in the last fiscal year as major process bottlenecks were removed. It has been working towards substantially, improving manufacturing efficiencies and securing continuous power supply, both from grid and alternate sources, at effective rates.
In the past, DOL had outstanding liabilities to associated companies, which it converted into preference shares. The remaining long term loans are on the verge of being completely paid off by the company. It is furthermore working on strategies to mitigate potentially adverse effects of international dumping. Judicious actions by the National Tariff Commission on imported dumped products, which have helped other companies in the chemical sector bodes well for the industry and Descon's overall wellness in the future.
Financial overview
Descon has enjoyed a good year with a year-on-year increase of 24 percent in the top line, and a 150 percent increase in profit before tax. Cost of sales was controlled and gross profit increased by nearly 50 percent. The increase in gross profit was driven by improved selling prices, changes in marketing strategy, and productivity improvements. A better geographical mix that is migrating sales to areas with superior profitability, also contributed to an increase in profitability.
DOL has also been working towards curtailing expenses. While distribution and selling costs remained constant and finance costs decreased, administrative expenses and other expenses increased. Overall expenses increased marginally. With major improvements in the bottom-line, EPS grew by 357 percent. Given the losses in previous years, improvements in EPS are a welcome sign for investors. No dividends for ordinary shareholders were announced in 2017, and preference share continued to carry its cumulative dividend of 12 percent.
Currently, Descon is working on a diversification strategy to reduce its dependence on the textile sector. As a result, it has entered the food and beverage sector as well as the disinfectants sector, which includes livestock and poultry. It also plans to increase its manufacturing capacity in the near future.
Future outlook
A challenge that Descon will continue facing if the National Tariff Commission does not take notice and address the issue is of competition from dumped imports. Energy shortfall is another impediment to Descon's performance but it has taken measures to circumvent it. Textiles are the largest end-use market for hydrogen peroxide products. Weak performance in the textile sector results in weak demand and lower turnover for Descon. The recent textile export numbers released by SBP show improvement on that front.
In FY16, textile production grew by only 1 percent, however exports of August this year shown a 9 percent increase on a year-on-year basis. The textile package and the GSP Plus scheme help increase production of the textile sector. On the other hand, stiff competition from regional competitors and low demand from key market China could depress textile exports and hence decrease its production.
With substantial changes in its corporate strategy, ie its goal towards diversification and improving its geographical mix, DOL is on track to materially improve its growth, market share and financial performance. As long as Pakistan continues to gain economic momentum, there is no energy crises, and the textile sector continues on its recent positive trend, Descon should continue to grow.
Source: Company accounts
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Pattern of shareholding
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Shares held %
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Directors, Chief Executive Officers, and
their spouse and minor children 39,194,450 38.43%
Associated Companies, undertakings
and related parties. (Parent Company) 17,506,404 17.16%
NIT and ICP 0 0.00%
Banks Development Financial Institutions,
Non-Banking Financial Institutions 0 0.00%
Insurance Companies 0 0.00%
Modarabas and Mutual Funds 0 0.00%
Shareholders holding 10% or more 23,774,950 23.31%
General Public
a. Local 43,605,039 42.75%
b. Foreign 500 0.00%
Others
Joint Stock Companies 1,693,607 1.66%
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Source: Company accounts
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