LAHORE (PPI) - Stable gas prices and a dedicated high-pressure gas pipeline combined with an uptrend in HP led to higher gross margins for Descon Oxychem Limited (DOL) at 33 percent. The company is facing some financial constraints with Debt to Equity and Debt to Asset ratios of 4.15x and 0.74x as of Jun10 respectively. However, 1HFY11 financials show a significant improvement with interest cover at 1.07x compared to last years unfavourable coverage. With over 95 percent local sales, DOL is also expected to benefit from the imposition of GST with reduced working capital requirements. Growing international demand for the countrys textile products and expansion in the polyester industry is expected to keep demand and prices of HP firm. DOL witnessed a sales growth of 77 percent YoY to Rs706m in 1HFY11against Rs306m in the same period last year. It is pertinent to note here that the company is currently operating at full capacity compared to a meager production in the same period last year when it faced severe gas issues. Growth was further aided by a significant increase in peroxide prices to over Rs60/kg compared to just Rs33/kg in the same period last year. Additionally, FX movement further acts as a hedge for its revenues in the domestic market given that it follows international HP prices. It should also be noted that DOL derives about 6 percent of its revenues from export of HP to countries in the region including India, Dubai, Sri Lanka and Turkey. The same could be enhanced further when the international market looks relatively more attractive. The company produces Hydrogen Peroxide (HP) which is a strong and environmental friendly oxidizer and is used to bleach textile and paper products in particular. However, majority of HP consumption is observed to have been in the textile sector while the country is not a major producer of hi-grade paper which traditionally uses HP as its input. Natural gas is a key raw material for its production process, rates of which have remained unchanged at Rs382/mmbtu since Dec09. Combined with an uptrend in HP prices it was reflected in higher gross margins for DOL at 33 percent in 1HFY11 compared to only 4 percent in the same period last year. Furthermore, DOL also saves on its packaging costs by producing Jerry Cans for itself using imported raw material, high-density polyethylene (HDPE) which is a petrochemical. According to the management the company now has a dedicated high-pressure gas pipeline operating since May10 which curtailed production losses and enhanced efficiency in 2QFY11. Earlier, it had an agreement with SNGPL which provided DOL with feed gas on a priority basis which was later stopped (in 3QFY10). However, gas cuts during winters (Jan-Mar11) are not expected to affect companys productivity during 3QFY11 due to agreement with the SNGPL for uninterrupted gas supply. DOL also experienced maintenance shutdown for 15-20 days during 3QFY11. However, it is not expected to affect sales for the quarter as the company is assumed to have produced additional quantities of HP prior to the shutdown so as to assure uninterrupted supplies in the market. DOL operates in a highly capital-intensive industry which initially required a significant amount of capital expenditure for which it obtained long-term financing from a consortium of financial institutions led by ABL (Rs1.47b as 64 percent of total debt) along with other loans. This was specifically in relation to HP plant installation, construction and fabrication project. DOL has Debt to Equity and Debt to Assets ratios of 4.15x and 0.74x as of Jun10 respectively. The company continues to face financial constraints. However, our conversation with the management revealed that its loan of Rs1.47b has now been restructured which would further ease off the burden in the rest of FY11. HP industry is still in its infancy in Pakistan and therefore, remains protected by the government; evident from the fact that there are only 2 companies (Sitara Peroxide and DOL) producing the product in the country. For instance some of the incentives include; (1) doubling HP import duty from 5 percent to 10 percent, (2) providing inland freight subsidy for exports, and (3) anti-dumping duty on Chinese HP imports (71 percent) and on Indonesian and Taiwanese imports (25 percent) bode well for DOL sales going forward. Pakistan faces a shortage of approximately 10K tons of HP each year which is then filled through imports.