Sitara Peroxide Limited (PSX: SPL) was established in 2004 as a public limited company under the Companies Ordinance, 1984 (now Companies Act, 2017). It is a part of the larger Sitara Group. The latter started with its first company, Sitara Chemical Industries Limited. Sitara Peroxide is the first company to produce hydrogen peroxide on a large scale, in the country.
The company’s plant is located at Sheikhupura Road, Faisalabad, from where it manufactures and sells hydrogen peroxide (H2O2). Due to the nature of the product, its distribution is done in custom-made drums and tanker trucks. As per the company’s website, up to 50 percent concentration product is distributed in cans and/or multi-boxes and must not be stacked. The bulk road tankers are equipped as such with hoses and fittings to deliver orders into the customers’ bulk storage tanks.
Shareholding pattern
As of June 30, 2019, the directors, CEO, their spouses and minor children own a little over 37 percent of the shares. Out of this, around 32 percent shares are owned by the CEO, Mr. Imran Ghafoor. Around 43 percent are held by the local general public while joint stock companies hold close to 11 percent. Of the remaining shares, 6 percent are shown in the ‘others’ category while 2 percent is in the ownership of the foreign public.
Historical operational performance
Topline and profit margins both have been rather fluctuating over the years with profit margins peaking in FY11 and taking a hit the following year in FY12. The past two years, FY18 and FY19 have seen some stability and increase in profitability.
The revenue of Sitara Peroxide declined year on year, in FY15, by 7 percent owing to lower production as well as lower prices for hydrogen peroxide. The latter was brought about competition from cheaper dumped imports primarily Bangladesh, which was emerging as a new hydrogen peroxide manufacturing zone. The National Tariff Commission (NTC) was requested to investigate. Moreover, revenue and margins for this company and sector are dependent on the performance of the textile sector as the latter is a major consumer of hydrogen peroxide. The underperformance of the textile sector, along with high power tariffs and prices of imported raw materials halved the gross and operating profits and pushed the company towards losses.
In the following year, FY16, the company along with the rest of the industry was successful in getting NTC to impose anti-dumping duty on import of hydrogen peroxide for five years. Although revenue declined marginally by 1 percent, the company had grown its production in volume terms, increasing its capacity utilisation. Efficient cost management allowed the company to reduce its cost of manufacturing despite the fact that prices of natural gas and RLNG continued to increase. A major contribution in decline of costs as a percentage of revenue was made by decline in electricity costs, raw materials and packing materials as well as freight. Thus gross margins nearly doubled while the company recorded a positive net profit for the year.
In FY17 the company’s financials took a hit again with margins falling below FY15 levels. The topline reduced by a significant 19 percent due to lower capacity utilisation which in turn was due to technical issues faced at the plant. In the first half of the year, capacity utilisation dropped to 60 percent, picking up later in the second half after corrective measures had been taken. Hence, volumes sold were also comparatively low. The lower sales caused costs to consume a larger share of the revenue. Despite lower sales volumes, costs remained more or less unchanged, resulting in margins to decline, with a net loss of Rs87 million.
During FY18, the growth rate of topline recovered, increasing year on year by nearly 25 percent, owing to higher selling price of hydrogen peroxide, specifically in the second half of the year. Increase in price of imported raw material and RLNG prices caused cost of manufacturing to increase, however as a percentage of revenue, it had reduced significantly, from nearly 96 percent in FY17 to 88 percent in FY18. Other income brought some relief, coming from sale of catalyst, however, it was not sufficient to cover the increase in costs overall, thus causing a net loss, albeit lower than that recorded in FY17.
The general elections of FY18 and with it the change of government brought with it economic instability which continued in FY19. Despite the subdued business activity, Sitara Peroxide managed to grow its topline by a whopping 54 percent year on year as a result of higher selling price combined with higher production; that in turn, was a result of higher capacity utilisation. Cost of manufacturing, as a percentage of revenue also fell incredibly, from consuming 88 percent of topline in FY18 to consuming 74 percent in FY19. Although other expenses only made 1 percent of the revenue, in absolute terms it increased from Rs2 million in FY18 to Rs22 million in FY19. This primarily came from workers’ welfare fund and profit participation fund. The improvement in sales essentially brought the company out of a period of loss.
Half yearly results and future outlook
The topline fell by 11 percent year on year in 1HFY20 as a result of a fall in prices of hydrogen peroxide internationally. Cost of manufacturing was mainly affected by high cost of RLNG and power, consuming 89 percent of the revenue, leaving little room for other costs to be absorbed. The fall in selling prices and rise in cost of production adversely affected the profit margins eventually causing a net loss of Rs17 million in 1HFY20 as compared to a profit of Rs184 million in 1HFY19.
With a fall in oil prices internationally, and the expectation of RLNG tariff to reduce, the company foresees its profitability improving. The focus on exports of textile sector would boost the demand for hydrogen peroxide which would also contribute to the company’s better performance in the future.