PACRA Maintains Entity Ratings of Descon Oxychem Limited
The ratings recognize the company's leading position in the local Hydrogen Peroxide market, supplemented by efficient production process, sound technological infrastructure, and effective control environment. Ratings also draw comfort from Descon Oxychem’s association with a financially sound and experienced business group - DESCON - which has continuously demonstrated support. One of the only two manufacturers in Pakistan market, Descon Oxychem has gradually strengthened its footprints; particularly in north region. Market Share enhanced considerably over the years (FY17: ~53%, FY15: ~44%). Superior capacity utilization than peers takes benefit from advanced technology and specifications backed by required capital investment. Related debt from financial institution has been repaid completely, while debt from associates converted into cumulative, non-voting preference shares. Capitalizing on available fiscal space, the company is poised to take expansion; thereby increasing capacity by 25%, to be financed entirely through debt, to the tune of PKR 1bln. Currently Free cashflows (FCFO) provides requisite cushion for expansion, after servicing for cumulative preference dividends (having character of interest). Lately profitability declined slightly in the wake of thin pricing, translating into lower FCFO. Sustainability of FCFO remains critical, going forward, keeping in view fluctuating nature of hydrogen peroxide international price trend, as well as moderate demand growth in local industry.
The ratings are dependent on improved competitiveness of the company. Timely execution of expansion plan, translation of the same into added profitability, would impact positively on the ratings. Meanwhile smooth operations from current plant would remain important. Prudent management of debt matrix, keeping it conservative, shall be critical.
Descon Oxychem Limited (DOL), incorporated in 2004, is listed on Pakistan Stock Exchange and produces Hydrogen Peroxide (H2O2). The plant started commercial production in Mar09. DESCON Group, the principal sponsor of DOL, holds majority shareholding (~61%) through associated companies (~17%) and sponsoring family (~44%), while, 30% and 9% stake rests with general public and financial institutions, respectively. DESCON has footholds in engineering business through its flagship company - Descon Engineering Limited. The group, over the years, has expanded its horizons beyond Pakistan, particularly the Middle East.
DOL's board, comprising eight-members, is dominated by representatives of DESCON. Mr. Abdul Razak Dawood - founder and key man behind DESCON - is the Chairman of the board. He is a veteran and business icon. Mr. Imran Qureshi is the newly appointed CEO of the company, joined DOL since 28th May 2018. Mr. Imran Qureshi is foreign qualified, having overall experience of ~20 years in his portfolio. Capitalizing his experience amidst expansion plans would remain important.