Sohail Ahmed Qureshi
PACRA Upgrades Entity Ratings of Descon Oxychem Limited
Descon Oxychem Limited (hereafter referred to as ‘DOL’ or ‘the Company’) is primarily engaged in the manufacturing, procurement and sale of Hydrogen Peroxide (H2O2) & allied products having variety of applications in multiple sectors (textiles, mining, pulp & paper, food & beverages). The ratings reflect Company’s leading position in the local H2O2 market, underpinned by solid sponsorship background and propitious clientele base. Pakistan’s H2O2 industry shown progress as application of definitive anti-dumping duty offers enabling environment to local producers. The industry is dominated by a few players catering 80% of local market demand of Hydrogen Peroxide. The cost break up is dominated by RLNG and power expenses, thus industry’s reliance on the production process generates substantial risk as prices remain volatile. Hydrogen Peroxide’s demand from textile consumers has significantly revived on account of resumption in operations post-pandemic crises. DOL manages to augment its revenue position by using state-of-the-art technology plant,efficient production processes, and strengthening its footprint; predominantly in the North region. Over the years, the Company has made considerable volumetric growth as import substitution is being encouraged. The key opportunity is generically available to the Company if investments are made in terms of serving more demand from local market. During FY21, DOL successfully completed its expansion project with increase of 25% plant capacity. DOL has potential to earn high margins by moving towards specialized products (cosmetics, poultry, livestock, & sugar). With increased share of exports, the Company intends to create a natural hedge against price depression. Financial risk profile of the Company remains strong characterized by efficient working capital management and strong coverages. DOL’s capital structure is low leveraged; encompassed LTBs and solid equity base. Further, the Company substantially paid out its long-term debt acquired for expansion during the period. No long-term borrowing is being planned currently. Ratings draw comfort from DOL’s association with the financially sound and experienced business group - DESCON. Going forward, the Company intends to materialize the envisaged strategies by strong oversight of risk, compliance and code of corporate governance.
The ratings are dependent on the DOL’s ability to retain its position amidst competitive business environment and management’s ability for successful strategy execution by tapping new segments. Timely translation of the expansion into better profitability would positively impact the ratings. With growth in DOL’s revenue; prudent financial performance, strong coverages and maintaining effective liquidity profile shall remain imperative.
Descon Oxychem Limited, incorporated in 2004, is a listed concern engaged in the production & sale of Hydrogen Peroxide. The Company started commercial production in Mar 09. Descon Group, the principal sponsor of Descon Oxychem, holds majority shareholding 72.63% through associated companies while 27.37% stake rests with the general public and financial institutions. Descon Group has strong foothold in engineering business through its flagship company – Descon Engineering Limited. The Group, over the years, has expanded its horizons beyond Pakistan, particularly in the Middle East.
The Company’s Board, comprising eight-members, is dominated by representatives of Descon Group. Mr. Taimur Dawood is the Chairman of the Board while Mr. Muhammad Mohsin Zia is the CEO of the Company. He holds relevant industry experience of more than two decades.