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 the 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, 2022, OCTOPUS has a total of 136.75 million shares outstanding which are held by 6322 shareholders. Avanceon Limited is the largest shareholder of OCTOPUS with a stake of 80 percent in the company. This is followed local general public holding 12.3 percent shares of OCTOPUS. Modarabas and Mutual funds account for 1.96 percent of the outstanding shares of the company. The remaining shares are held by other categories of shareholders.
Historical Performance (2019-22)
OCTOPUS’s topline and bottomline has been following an upward trajectory since 2020, however, the magnitude of growth has been eroding each year. A sneak into the margins of the company shows that while gross margin followed a persistent downward route from 2019 to 2022, operating and net margins greatly picked up in 2020, followed by a significant plunge in 2021. However, both the latter mentioned margins ended up recovering to some extent in 2022. The detailed performance review of each of the years under consideration is given below.
In 2020, OCTOPUS’s topline multiplied by over 14 times 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 the 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 a GP margin of 97.2 percent in 2020. Operating expense grew by 12 percent year-on-year in 2020 primarily due to higher payroll expense which grew as the number of employees increased from 4 in 2019 to 21 in 2020. Operating profit grew by over 53 times in 2020 with an OP margin of 91.6 percent versus 25.3 percent in 2019. With 0 percent debt-to-equity ratio, the company didn’t have any finance cost on its accounts. Net profit grew by around 89 times in 2020 to clock in at Rs.219.74 million with an NP margin of 79 percent versus 13.3 percent recorded in 2019. EPS shrank by 18 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 126 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 18.6 times 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 a 76 percent escalation in gross profit in 2021, however, GP margin slumped to 75.7 percent. Operating expense grew by over 7 times in 2021 mainly due to massive allowance worth Rs.58.068 million booked against ECL. During 2021, OCTOPUS also earned an exchange gain and profit of TDR, resulting into other income of Rs.11.14 million. Operating profit grew by 42 percent year-on-year in 2021 with OP margin slipping to 57.7 percent. Net profit registered a 57 percent year-on-year growth in 2021 with an NP margin of 55.3 percent and an EPS of Rs.2.53.
In 2022, OCTOPUS’s topline posted a skimpy 12 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 104 percent due to Pak Rupee depreciation and high inflation. Gross profit slipped by 20 percent year-on-year in 2022 with GP margin narrowing down to 55 percent. Operating expense grew by 64 percent year-on-year mainly on account of 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 22 times spike in other income in 2022 which was the consequence of exchange gain on its foreign sales as well as mark-up from the parent company. Operating profit grew by 19 percent year-on-year in 2022 and OP margin also rebounded to clock in at 62.6 percent in 2022. Net profit rose by 17 percent year-on-year in 2022 to clock in at Rs.405.063 million with an NP margin of 59 percent and an EPS of Rs.2.96.
Recent Performance (1HCY23)
The first quarter of CY23 remained quite depressed in terms of sales revenue due to non-opening of L/Cs which greatly affected the AMS product business. However, the sales posted in uptick in the second quarter supposedly due to the digitalization business which mustered export revenue for the company. However, overall, OCTOPUS’s topline slumped by 17 percent year-on-year in 1HCY23. Cost of sales grew by 19 percent year-on-year as its subscription digital business costs which were denominated in US Dollars registered an exponential rise due to considerable depreciation in the value of Pak Rupee. Gross profit narrowed down by 35 percent year-on-year in 1HCY23 with GP margin marching down from 65.8 percent in 1HCY22 to 51.1 percent in 1HCY23. Operating expense grew by 69 percent year-on-year in 1HCY23; however, it was offset by a staggering 155 percent uptick in other income during the period which is apparently the consequence of exchange gain. Other income saved the day for OCTOPUS during 1HCY23 and its operating profit managed to post a 13 percent year-on-year growth with OP margin greatly improving from 74.8 percent in 1HCY22 to 101.7 percent in 1HCY23, which is almost the double of the GP margin for the year. A meager finance cost of Rs.0.034 million even after 89 percent year-on-year growth in 1HCY23 couldn’t affect the bottomline as it posted a 13 percent year-on-year upswing to clock in at Rs.271.86 million with an NP margin of 93.5 percent versus 68.8 percent during the same period last year. EPS also progressed from Rs.1.53 in 1HCY22 to Rs.1.73 in 1HCY23.
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. This is anticipated to be the game changer for the company and is likely to offset the lackluster performance of AMS product business locally. However, with sharp Rupee depreciation, there is an unabated surge in the company’s cost. To curb this, OCTOPUS is planning to hedge its margin shortfall by undertaking contracts denominated in US dollars. Moreover, the company is also seeking coverage from AMS international particularly Middle East business.