Saturday, 21 September 2013

Descon Oxychem and Sitara Peroxide - Improved Financials

Descon Oxychem and Sitara Peroxide - Improved Financials

My post concerns two companies in the hydrogen peroxide industry in Pakistan. Descon Oxychem Limited (DOL) and Sitara Peroxide Limited (SPL). Both of the companies produce hydrogen peroxide that is a chemical used for bleaching, paper making, etc. Not surprisingly, the gross profit margin of these two companies follows the local of hydrogen peroxide prices as illustrated through the below graph:

Source: Business Recorder, Company Reports

Notice the absence of gross margins from the last two quarters. This is because the results pertaining to these have not been announced as of yet. Hydrogen Peroxide prices have however increased substantially during the period. Standing at Rs. 56 per kg today as opposed to Rs.44 in March-13, showing an increase of 16%.

An improvement in gross profit margins appears to be in order for the two quarters, that is, June 13 and September 13. The same analysis could be extended to operating margin due to comparatively lower administration and selling costs.

The final idea lends credit to SC Securities which says that the companies will experience declining finance costs too due to improved cash flows and lower working capital finance requirements.

I would say that a decline of 50 bps points in interest rates during the period should also help in decreasing finance costs. 

Owing to improved gross margins and lower finance costs, improvement in financial performance of the two companies, DOL and SPL appears to be in order for the quarters ending June-13 and Sep-13 .


  1. Thanks for sharing this Bilal, but here is one catch, one discrepancy in the data. Did you observe that despite the decline in prices, when SPL had negative GM, DOL still managed to sustain GP though at lower margins. But as margins for SPL recovered before declining 2nd time, DOL fell sharply as compared to SPL. What factors contributed towards DOL profitability earlier? Is there a difference in the business model or is it due to the forward contracts? Because if later assumption is true, DOL won't be able to benefit from the high per oxide price. SPL would benefit more.

    What do you see the price sustainability for peroxide going forward given the rupee depreciation?

    1. Just checked. Numbers are fine. I guess that adds an element of volatility to the results. But given we have a two quarter horizon, some averaging can be expected.

  2. Thank you for the comments asif. I just plotted the curves for my own satisfaction really. Like wanted to see if price really affect gross margins. Probably like putting in the numbers if they really make sense and observe the beauty of it all in the end. Yes there seems to be significant difference in the June quarter. Probably too big to be explained by any other than an error. Will check my numbers. I don't think that the two companies sell their prices on forwards otherwise the margins would not have been that volatile as witnessed from the graph in the first place. The companies' compete with imports and is mainly import substitution. Hence they should follow the import prices which on the other hand should increase given the dollar appreciation. So yes. That also provides an upside. This also brings the aspect of international prices into play. Finally, despite the similarities significant differences are also there which deserve their own analysis. Also, a more thorough analysis that comes down to the EPS level would serve better. All in due course. board meeting for descon chemical has been announced on 30th september. Lets see when is that for DOL announced. DOL again has its own merits. I have tons of ideas. Need to be quicker with them! :)

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