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Key takeaways from Descon Oxychem: an analyst briefing

Descon Oxychem is a part of Descon’s Chemicals line of business. The Company offers the largest and the most complete product line of Hydrogen Peroxide products. Its products offer top of the line, world class range that meet all international safety, quality and sustainability standards.

It is operated the Descon way, driving business and being responsible. This implies sustainable chemistry, respecting the people and the environment, acting as a responsible player, taking into account and meeting sustainable challenges faced by our stakeholders.

With an unyielding commitment to hygiene, safety, environment and sustainable development at its core, backed by an experienced team, the company provides exemplary customer service, product quality, uninterrupted supply chain, and technical service. On 30 June 2016, the business crossed 4.8 million man-hours without a Lost Time Injury, validating its mission.

It supplies customized chemistries for textiles, food/ beverage safety, and other industrial and consumer markets. Further, the company is actively exploring growth in international markets for pulp and paper, cosmetics, and electronics manufacturing.

As a company, it continues to ensure a commitment to the chemical industry and the communities that we serve. There are four overarching aims: by research and innovation to build a better future; to protect and sustain the environment that it collectively share; to provide quality products and services to its customers, consequently offering higher return to the shareholders; ensuring maximum satisfaction to its employees and stakeholders.

Descon Oxychem (DOL) is the largest producer of Hydrogen Peroxide (H2O2) in Pakistan. H2O2 is used in textiles, mining and food beverages. Industry demand is estimated around 68,000 tons, while DOL commands half of the market share. Recently, DOL conducted analyst briefing, where the company discussed its recent financial performance and provided future outlook to investors/analysts.

Following are the key takeaways of today’s session:

The annual domestic demand of H2O2 is estimated around 68,000 tons, out of this 34,000 tons is supplied by DOL. Another major domestic supplier of the commodity is Sitara Peroxide (SPL). Remaining 20% demand is met through imports.

H2O2 is used in textile (provides high bleaching impact at extremely competitive cost), mining (used as an oxidant and effluent treatment) and food & beverages (to create sterile environment in packing).

Other than above industries there is potential of H2O2 use in cosmetic, water treatment, livestockpoultry and tetrapak disinfection, which can add around 20,000 tons to demand.

 

Going forward, capacity expansion of around 8,500 tons will strengthen DOL’s market leadership. The company will strive towards being the lowest cost producer (energy conservation) via international bench marking and will operate at optimum productivity level to fully utilize its assets. The management plans on developing markets and growing their share with better margins and specialized segments.

The management expects 2019 production to be around 33,000 tons. Descon has Swedish technology with better efficiency while their local competitor Sitara has a hybrid Chinese-Turkish technology, which has lower efficiency.

Demand of H2O2 can be linked to GDP growth. Moreover, major demand driving segments such as mining, food & beverages as well as textile are growing faster than GDP. Bangladesh, Korea and Thailand are major competitors with respect to imports.

The company draws up to 70% sales from northern part of the country because major industries are situated there. Demand supply equation in domestic market is balanced, while the company is even also exports. In the past, company has exported to Middle East, Central Asia etc.

Gas and energy are amongst the largest costs for the company so the management is trying to increase efficiencies on this front.

The company is trying to maximize its share in specialized products where margins are better and potential is huge.

Debt is likely to increase further due to upcoming expansion. The new loan acquired from ABL will be approximately at a rate of Kibor+1%. The existing intercompany loan is also on similar terms. The company expects to maintain debt to equity ratio around 65:35 going forward.

Depreciation of Pak rupee bodes well for the company as it produces products that are used for import substitution. Furthermore, the company also does not use imported raw material which saves it from downside of depreciation of currency.

As per industry details, work on Engro’s announced plant has not yet started, which may take around two years to bring the plant online from the date the work actually starts on the plant. The capacity of Engro plant is estimated at 20,000 tons. Moreover, SPL is trying to solve its technology constraints. As regards DOL expansion project, the management informed that LCs have already been established and production will come online by 1Q of 2020.

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