Sitara Peroxide Limited (PSX: SPL) was incorporated in Pakistan as a public limited company in 2004. The company is engaged in the manufacturing and sale of hydrogen peroxide.
Pattern of Shareholding
As of June 30, 2022, SPL has a total of 55.1 million shares outstanding which are held by 7012 shareholders. Local general public is the largest shareholding category of SPL with a stake of 49.30 percent in the company. This is followed by Directors, CEO, their spouse and minor children holding 37.26 percent shares of SPL. Around 8.13 percent of the company’s shares are held by joint stock companies while 2.41 percent shares are with the foreign general public. Modaraba companies account for 1.3 percent of the outstanding shares of SPL. The remaining shares are held by other categories of shareholders.
Historical Performance (2018-22)
Among the years under consideration, SPL’s topline posted a year-on-year dip in two years i.e. 2020 and 2022. In the remaining years, the net sales posted an uptick. Conversely, SPL’s bottomline which posted net loss in 2018, rebounded in 2019 to post net profit, however, in the subsequent years, the bottomline couldn’t gain any momentum and kept declining to again enter the loss zone in 2022. SPL’s margins follow the same trajectory as its bottomline whereby they maxed out in 2019 and then thinned down in the following years. The detailed performance review of each of the years under consideration is given below.
In 2019, SPL’s topline posted a year-on-year growth of 54 percent. This came on the back of 18 percent growth in volume as well as higher prices during the year. SPL has an installed capacity of 30,000 tons of hydrogen peroxide per annum. In 2019, the company utilized 84 percent of its capacity to produce 25,324 tons of hydrogen peroxide compared to 70 percent capacity utilization in 2018. Steep rise in RNLG tariff coupled an increase in the cost of raw and packaging materials owing to Pak Rupee depreciation as well as indigenous inflation pushed the cost of sales up by 29 percent year-on-year in 2019. However, better volume and prices drove the gross profit up by 249 percent year-on-year in 2019, culminating into a GP margin of 26 percent versus 11.5 percent in 2018. Higher commission to the distributors due to increase in sales volume and higher freight and octroi charges due to increase in fuel prices translated into a 49 percent year-on-year rise in distribution expense in 2019. Administrative expense also posted a 15 percent year-on-year uptick in 2019. Other expense grew by over 10 times in 2019 to clock in at Rs. 22.07 million on the back of higher provisioning against WWF and WPPF. However, the growth of other expense was nullified by a 44 percent rise in other income which was the result of higher income from the sale of catalyst. Operating profit grew by 850 percent year-on-year in 2019 with OP margin boasting a staggering growth to clock in at 18.1 percent versus 2.9 percent in 2018. Finance cost grew by 25 percent year-on-year in 2019 due to rise of discount rate. Gearing ratio improved from 32 percent in 2018 to 25 percent in 2019 as the company paid off its liabilities during the year and also because of the accumulated profit which pushed up its equity. SPL was able to record a net profit of Rs.207.38 million in 2019 as against the net loss of Rs.65.40 in 2018. NP margin clocked in at 10.2 percent in 2019 while EPS stood at Rs.3.76 versus a loss per share of Rs.1.19 in 2018.
In 2020, topline slid by 14 percent year-on-year. While prices remained stable, the sales volume of the company dipped as due to lockdown, the local textile industry, which is the main customer of SPL operated at a curtailed capacity. In 2020, the company operated its plant at 78 percent capacity and produced 23,295 tons of Hydrogen peroxide which was 6 percent lesser than the capacity utilization achieved by SPL in 2019. The company made the apt decision by introducing a new product “Sitara Safe” which could be used a surface disinfectant and also for sterilization. The new product gained traction owing to COVID related circumstances and partially offset the low demand of hydrogen peroxide during the year. While low capacity utilization resulted in 6 percent low cost of sales in 2020, gross profit sank by 39 percent year-on-year with GP margin sliding down to 18.5 percent due to increase in tariff on RNLG. Distribution and administrative expense posted a year-on-year rise of 2 percent and 11 percent respectively in 2020 due to higher payroll expense, commission to distributors as well as advertisement charges incurred during the year to promote its new product. Other expense posted a 70 percent year-on-year decline in 2020on the back of lower provisioning against WWF and WPPF while other income ticked up by 17 percent year-on-year due to increased income from the sale of catalyst in 2020. Despite cost containment, weaker sales culminated into a 54 percent year-on-year plunge in operating profit with OP margin trimming down to 9.8 percent in 2020. Finance cost inched down by 9 percent year-on-year in 2020 as the company settled off a considerable portion of its debt during the year. Gearing ratio further tapered off to 19 percent in 2020. SPL recorded a 64 percent year-on-year drop in its net profit which clocked in at Rs.74.24 million in 2020 with an NP margin of 4.3 percent. EPS dived down to Rs.1.35 in 2020.
In 2021, SPL’s topline posted a marginal growth of 7 percent year-on-year. This was on the back of stable prices while demand remained lackluster. During 2021, SPL utilized 73 percent of its plant’s capacity and produced 22,006 tons of Hydrogen per oxide which was 5 percent lesser than the production volume of 2020. The shortage of gas also contributed a great deal to the low capacity utilization during the year. Low capacity utilization rendered the company unable to absorb the fixed overhead cost which pushed up the cost of production per unit. Moreover, increased tariff on RNLG as well as high cost of chemicals and packaging materials resulted in a 41 percent year-on-year decline in SPL’s gross profit with GP margin further subsiding to clock in at 10.3 percent in 2021. Distribution and administrative expense grew by 15 percent and 22 percent respectively in 2021, reflecting high inflation. High operating expense was in spite of low sales volume and a comparable number of human resources. Relatively stable local currency coupled with lower provisioning against WWF and WPPF translated into a 70 percent year-on-year drop in other expense. Conversely, other income climbed up by 169 percent year-on-year in 2021 on account of income from sale of catalyst coupled with unwinding gain on GIDC provision as well as exchange gain. In 2021, the company also booked an allowance of Rs. 28.29 million against expected credit losses, which was up by 11 times when compared to the allowance booked in 2020. Operating profit further subsided by 64 percent year-on-year in 2021 with OP margin falling down to 3.3 percent. Finance cost tumbled by 41 percent year-on-year in 2021 on account of lower discount rate and lesser debt outstanding at the year-end. Gearing ratio caved in to 14 percent in 2021. SPL’s bottomline further shriveled by 53 percent year-on-year in 2021 to clock in at Rs.34.71 million with an NP margin of 1.86 percent. EPS shrank to Rs. 0.63 in 2021.
meager topline growth attained by the company in 2021 was reversed in 2022 as its topline fell by 7 percent year-on-year on the back of low sales volume due to constricted economic activity. The withered net sale in 2022 was in spite of higher prices of hydrogen per oxide during the year. Owing to the unavailability of gas, the company couldn’t even meet the reduced demand and operated at 61 percent capacity – the lowest among all the years under consideration and produced only 18,247 tons of Hydrogen per oxide in 2022.
Despite low sales volume and reduced capacity utilization, cost of sales went up by 8 percent year-on-year in 2022. This was due to massive rise in RLNG tariff due to Russia-Ukraine war which created commodity crisis in the global market. This coupled with weaker Pak Rupee proved to be a double whammy for SPL and resulted in a gross loss of Rs.63.20 million in 2022. The company (according to the published financial reports) has never reported a gross loss in its history. Distribution expense tumbled by 9 percent year-on-year in 2022. Conversely, administrative expense grew by 20 percent year-on-year due to high payroll expense and deposits written off during the year. High payroll expense was despite the fact that the number of employees was reduced from 323 in 2021 to 309 in 2022. The company didn’t book any provisioning against WWF and WPPF during the year and hence didn’t incur any other expense during the year. Other income also reduced by 95 percent year-on-year in 2022. Allowance for expected credit losses further swelled up by 20 percent year-on-year in 2022. All these factors resulted in an operating loss of Rs.334.97 million in 2022. Finance cost piled up by 7 percent year-on-year in 2022 due to high discount rate although the company paid off a sizeable portion of its debt in 2022. Contraction in equity as well as cash and bank balance resulted in a comparatively higher gearing ratio of 16 percent in 2022. SPL recorded a net loss of Rs.341.21 million in 2022 with a loss per share of Rs.6.19.
Recent Performance (9MFY23)
2023 hasn’t proved to be encouraging for SPL so far. During 9MFY23, its topline dwindled by 66 percent year-on-year due to low capacity utilization as the company battles against the unavailability of RLNG and other raw materials on account of import restrictions. Cost of sales nosedived by 54 percent due to curtailed production; however, the company incurred a gross loss of Rs.156.23 million in 9MFY23 against the gross profit of Rs.85.02 million in 9MFY22. Distribution and administrative expense toppled by 76 percent and 12 percent respectively in 9MFY23. The company also recorded other expense of Rs.20.94 million in 9MFY23 as against no other expense during the same period last year. This might be due to exchange loss. Other income slumped by 10 percent year-on-years in 9MFY23. Impairment loss on financial assets continued to surge and recorded a growth of 75 percent year-on-year in 9MFY23. SPL’s operating loss magnified by 198 percent in 9MFY23 to clock in at Rs.303.69 million. Finance cost also grew by 26 percent year-on-year in 9MFY23 due to high discount rate and higher running finance related borrowings due to cash flow constraints owing to losses. Net loss grew by 114 percent year-on-year in 9MFY23 to clock in at Rs.302.83 million with a loss per share of Rs.5.50 versus Rs.2.57 during the same period last year.
Future Outlook
While the demand and prices of Hydrogen per oxide are expected to remain on the higher side, high prices of RLNG and other imported raw materials will continue to take its toll on the margins and bottomline of SPL. Recently, the unavailability of RLNG and other raw materials due to import restrictions rendered the company unable to meet the demand and halt its operations. With the withdrawal of import restrictions of late, whether or not the company can optimize its capacity utilization is yet to be seen.