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Descon Oxychem (DOL): Analyst Briefing Key Takeaways

Descon Oxychem Limited (DOL) is the largest producer of Hydrogen Peroxide (H2O2) in Pakistan. H2O2 is used in textiles, mining and food & beverages. Industry demand is 68k tons while DOL commands half of the market share. DOL today 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 68k tons out of which 34k tons is supplied by DOL while 28k tons is supplied by Sitara Peroxide (SPL). Around 15-20% demand is met by 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, livestock , poultry and tetrapak disinfection, which can add around 20k tons to demand.
• Going forward, capacity expansion of around 8.5K 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 company management also plans on developing markets & grow their share in better margin & specialized segments.
• The management expects 2019F production to be around ~33k tons. Descon (DOL) has Swedish technology with better efficiency while their local competitor Sitara (SPL) 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’s sales are 60-70%  in north because major industries are situated there. Demand Supply in domestic market is balanced while the company is even exporting right now. 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 that front.
• The company is trying to maximize its share in specialized products where margins are better and potential is huge.
• Debt is to increase further due to upcoming expansion. The new debt (from ABL) will be approximately at a rate of kibor+1%. The existing intercompany loan is also  on similar terms.  The company expects their debt to equity ratio to be around 65/35 going forward.
• Devaluation is beneficial for the company as they produce products that are used for import substitution. Furthermore, the company also does not use imported raw material which saves it from downside of devaluation.
• As per management knowledge, work on Engro’s announced plant has not yet started while it might take around 2 years before the plant comes online from the date the work actually starts on the plant. The capacity is expected at 20k tons. Moreover, SPL is trying to solve its technology constraints. On their own expansion project, the management guided that LCs have already been opened and production will come online by 1Q of 2020.