PACRA Maintains the Entity Ratings of Descon Oxychem Limited

Descon Oxychem Limited (‘DOL’ or ‘the Company’) is primarily engaged in the manufacturing, procurement, and sale of Hydrogen Peroxide (H2O2) & allied products having a variety of applications in multiple sectors including textile, mining, pulp & paper, water treatment, sugar, food & beverages, cosmetics, and poultry. The ratings reflect the Company’s leading position in the local H2O2 market, underpinned by a solid sponsorship background and propitious clientele. Pakistan’s H2O2 industry has shown progress during recent years as the application of definitive anti-dumping duty offers an enabling environment to local producers. During FY23, the Company indirectly benefitted from the substantial PKR devaluation owing to its export-oriented customer base, particularly the textile sector, which resulted in an impressive growth of ~58% YoY in revenues. However, during 1HFY24, the sales returned to normal owing to currency stabilization and an oversupply of imported H2O2, after clearance of consignments stranded amid import restrictions, prompting importers/commercial traders to slash the prices to remain competitive. The cost breakup is dominated by natural gas and power expenses, reflecting the risk generated by the Company’s reliance on price-sensitive energy sources. During 1HFY24, the company's profitability matrix was impacted by the steep rise in the prices of these cost drivers. 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 higher profitability region and segments. 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 capturing the vacuum created after the cessation of production of a key competitor. The financial risk profile of the Company remains good, characterized by efficient working capital management and healthy coverages. DOL’s capital structure is low-leveraged; encompasses STBs and a solid equity base. Ratings draw comfort from DOL’s association with the financially sound and experienced business group - DESCON. Going forward, the company intends to enhance its production capacity to achieve economies of scale and better consumption factors. Related FEED studies have been initiated. Moreover, the Company’s ability to pass on the impact of cost escalations by materializing the envisaged strategy remains pivotal for the sustainability of the profitability matrix.
The ratings are dependent on the DOL’s ability to retain its position amidst a changing business environment and the management’s ability for successful strategy execution by tapping new segments. With the growth in DOL’s revenue; prudent financial performance, strong coverages, and effective liquidity profile shall remain imperative.

About the Entity
Descon Oxychem Limited, incorporated in 2004, is a listed concern engaged in the production and sale of Hydrogen Peroxide. The Company started its commercial production in Mar 09. Descon Group, the principal sponsor of Descon Oxychem, holds a majority shareholding of 72.63% through associated companies while 27.37% stake rests with the general public and financial institutions. Descon Group has a strong foothold in the 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. Faisal Dawood is the Chairman of the Board while Mr. Muhammad Mohsin Zia is the CEO of the Company.