PACRA maintains DOL initial entity rating A+

May 23, 2023 (MLN): Pakistan Credit Rating Agency Limited (PACRA) has maintained Descon Oxychem Limited (PSX: DOL) an initial entry rating of "A+" for long-term and "Al" for short term with a stable outlook, the PARCA press issued on 17 May showed.

DOL is primarily engaged in manufacturing, procurement and sale of hydrogen peroxide and allied products in Pakistan, including textile, mining, pulp & paper, water treatment, sugar, food & beverages.

The ratings are dependent on the DOL’s ability to retain its position amidst changing business environment and management’s ability for successful strategy execution by tapping new segments.

Timely translation of the expansion into better profitability would positively impact the ratings.

With the growth in DOL’s revenue; prudent financial performance, strong coverages and effective liquidity profile shall remain imperative.

The ratings reflect Company’s leading position in the local H2O2 market, underpinned by solid sponsorship background and propitious clientele base.

Pakistan’s H2O2 industry has shown progress as application of definitive anti-dumping duty offers enabling environment to local producers.

The industry is dominated by mainly two players catering to around 80% of local market demand.

The cost breakup is dominated by natural gas and power expenses, thus industry’s reliance on the production process generates risk as prices remain volatile, yet holds the ability to pass on hikes.

Hydrogen Peroxide’s demand from textile consumers remains stagnant despite the challenging economic situation.

DOL manages to augment its revenue position by using a state-of-the-art technology plant, efficient production processes, and strengthening its footprint; predominantly in the North region.

Over the years, the company has made considerable volumetric growth as import substitution is being encouraged coupled with a weak competitive landscape.

At the end of March 2023, DOL recorded historic sales at Rs5.18 billion whereas bottom line stood at Rs1.30bn. The key opportunity is generically available to the company if investments are made in terms of serving more demand from the local market.

DOL has the potential to earn high margins by moving towards specialized products (cosmetics, poultry, livestock, & sugar). With increased share of exports, the company intends to create a natural hedge against price depression.

The financial risk profile of the company remains well characterized by efficient working capital management and strong coverages.

DOL’s capital structure is low-leveraged; encompassed 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 materialize the envisaged strategies by strong oversight of risk, compliance, and code of corporate governance.

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