Of the few small manufacturers on the MSM that have avoided any major losses since its inception, Oman Chlorine Company, a chemicals manufacturer, is one such unique entity. With a total turnover of RO6.75mn, the company operates a chloroalkali plant here that manufactures hydrochloric acid (HCL) used in the recovery of liquefied natural gas and oil during drilling. It also manufactures caustic lye, along with bi-products such as flakes and hypochlorate used in refineries and power plants facilities and in making detergents.

For nearly seven years since it became operational, the company managed to maintain robust double digit growth in net profit and total turnover, by relying on these four products. HCL and caustic lye contributed nearly 80 per cent towards its overall revenue. It limited its presence to the Oman and UAE markets, regions it catered to since its inception in 1997.

The fiscal downturn of 2008-09 that brought down its export revenues primarily from markets like UAE by 25 per cent (that contributed 50 per cent towards the company's overall turnover until 2009), heavily dented its net profit growth for FY2009. Even as the company increased its presence in the local market the following year (when revenue contribution from Oman increased to 60 per cent) it was unable to rebound strongly due to the loss of business from the UAE. The expiration of its tax holiday that year resulted in a marginal 2.9 per cent and 3.7 per cent net profit growth for FY2010 and FY2011.

These factors prompted Oman Chlorine to break away from its conservative approach and look at new avenues for growth. It introduced a new product to generate additional revenue, invested in a second chloralkali plant in a new target market and acquired a major stake in a company focused on industrial green field projects in the GCC. These initiatives are finally reaping benefits for Oman Chlorine from the beginning of this year, painting a promising outlook for fiscal 2012 and beyond.

Shifting profits

When the company was crafting its new strategies, it was noticed that the best way to enhance capacity utilisation at its plant, that hovered around 70 per cent in Q1 2011, was to introduce calcium chloride, another product to the market. Late last year, Oman Chlorine constructed a calcium chloride plant with a capacity to produce 900MT of calcium chloride that is manufactured from the chemicals produced at its chloroalkali plant.

Even though the company conceptualised the RO3.2mn project in 2009, the project was fully executed in 2011 out of internal funding. It became debt free in October that year, according to the chairman's 2011 annual report. "This product has good demand in the oil and gas sector and supplements the shortfall in demand for hydrochloric acid," says Sulaiman al Yahyai, chairman, Oman Chlorine. Demand for HCL is seasonal, based on the drilling activity in the oil and gas sector and manufacturing in other industries.

The plant was inaugurated in January this year and while the additional product contributed only around two per cent towards total turnover in the first quarter, this product, along with a strong rebound in oil and gas drilling activities in the sultanate, resulted in a 35 per cent jump in net profit for the Q1 of 2012 to reach RO730,000. The total turnover increased by 19 per cent from the year ago period. This compares to a mere 11 per cent and 8.2 per cent increase it exhibited in net profit and total turnover in Q1'11. At the end of the first quarter, the company's capacity utilisation stood at 83.9 per cent.

Consequently for the second quarter this year, net profit increased by 12 per cent to RO797,000 from a year ago. Al Yahyai says  results have been quite satisfactory though sales were lower than the production output during the period as more products were stocked meant to cater to the future demand. (At the time of going to press, Oman Chlorine had released only the unaudited results of net profits for the six months ended June 30, 2012).

If the results of the first two quarters are anything to go by, the company is well on track to achieve good profit growth for FY2012, says Joice Matthew, senior research analyst, United Securities.
Oman Chlorine is not banking on the calcium chloride product alone to fuel growth beyond 2012. As it noticed industrial and oil and gas sector activity reigned high in Qatar, Oman Chlorine formed a joint venture with a local company there and invested RO105,717 to set up a new chloroalkali plant. This is a market that contributes less than one per cent towards its overall sales. But with the new plant, the company hopes to increase its presence in this market.

Construction at this plant is expected to begin in the next few months as the project is in the final stages of regulatory approval, according to management executives at Oman Chlorine. This will help it enhance its presence in the GCC region. "The demand in Qatar is good as it does not have its own plant and the energy costs are low there. It will be difficult for existing plants in Kuwait and Saudi Arabia to cater to the growing demand due to logistics issues. Oman Chlorine along with its partner will have two plants across strategic locations to cater to the region," says al Yahyai.

Another new growth area for Oman Chlorine stems from a new investment it made in January last year, acquiring a 45 per cent controlling stake in Oman Industrial Development Company (OIDC), for RO225,000. OIDC?is focused on greenfield projects in the industrial area.

Al Yahyai says the management is open to all opportunities in the industrial oil and gas sector in the region through OIDC. The recent financial performance of Oman Chlorine, along with the new roadmap, has fostered strong investor confidence, resulting in the stock appreciating by 19 per cent year to date on the MSM.

Strong foundations

When a company that has not made too many big plans in over a decade, announces new initiatives to be executed in a year, investors often tend to get sceptic. But such has not been the case for Oman Chlorine as the company has a strong track record of stable performance, strong cash flows and no losses in its 14 years of operations.

Started in 1997 by Walid Azhari (currently the managing director of Oman Chlorine) and Anthony Georgiou (the deputy vice chairman), the company had a total capital base of RO4.65mn. This has now reached to RO6.2mn. Following its IPO in 1998, when it began commercial production in 2000, its total market capitalisation was a mere RO3mn which has now touched RO30.6mn. After the company broke even within first two years of commercial production, net profit and total turnover have both grown by double digits for at least seven years, albeit little inconsistent, based on the seasonal demand for HCL and caustic soda.

Oman Chlorine initially focused on the UAE market as the industrial and oil and gas sectors in the country were witnessing better growth than the Oman market. Markets like Qatar and beyond were not viable options at that time as it is difficult to transport chemicals like acid and caustic soda across long distances via road. Oman Chlorine's bouyant years were 2007 and 2008, when it saw the highest increases in net profit and total turnover as industrial activity and oil and gas projects picked up in the GCC market.

While the fiscal downturn that hit the GCC region resulted in Oman Chlorine's FY2009 net profit and total turnover dipping by around 13 per cent from the year ago period, the company managed to avoid losses by focusing on the Oman market where the oil and gas sector and industrial activity have been better than in markets like the UAE. The marginal 2.9 per cent rise in FY2010 in net profit along with a 6.5 per cent increase in total turnover are not considered too bad as the company incurred a tax outgo of RO127,023 due to the expiration of its tax holiday in September that year.

The company's financial performance improved slightly in 2011 and al Yahyai attributes this to the pick up in activities in the oil and gas sector and other industries. On an average, for three out of the four quarters in 2011, net profit has grown by 11 per cent, barring the third quarter when profit growth was just 2.4 per cent as the company focused on setting aside cash for its calcium chloride plant and clearing its outstanding debt. Total turnover growth has been inconsistent, rising 8.23 per cent, 22 per cent, 15 per cent and 14 per cent, during Q1, Q2, Q3 and Q4 of 2011, respectively.

It is quite noteworthy that in the last five years Oman Chlorine has managed to maintain robust profit margins between 37-45 per cent, while dividends have ranged between 15-20 per cent. Its highest ever cash dividend of 25 per cent was declared for FY2011. Net cash from operating activities stood at RO4.7mn rising 123 per cent from a year ago.

Steering course

For the near term, Oman Chlorine will continue to procure a majority of its revenue from the Oman market, until its Qatar plant becomes operational. Being the only chloro-alkali plant in the country, the company has faced virtually no competition in Oman and has a dominant share with just a few imports of caustic flakes from China, commonly used in the bleach manufacturing.

The local market, however, has its own set of challenges that include high energy costs and a shortage in the availability of natural gas. Electricity is a vital resource for Oman Chlorine to produce chemicals. "High operating costs including that of energy can be offset by maximising our efficiency and generating better sales," says al Yahyai. As far as natural gas goes, that is crucial for its next phase of expansion.

He is optimistic that this issue will be resolved soon as new blocks have been explored.
In the international markets, al Yahyai admits that competition has been strong, especially with a small plant existing in the UAE but this is not something that will deter Oman Chlorine from fueling its expansion plans. "As of now all of our ventures are in markets where the current and projected demand is good."

Its main challenge however has been the restriction on non-local equity ownership in locations like Qatar. But this issue seems to have been resolved with the company expecting to start construction at the new plant soon. "We expect contribution from investments in the region by 2015," says al Yahyai.
It is often said that companies enter a new phase of growth every decade and this has been true for Oman Chlorine. As the company continues to power on with its new initiatives in the local and global markets with a cautious approach, one can say with surety that the firm will continue to exhibit strong profitability for the foreseeable future.

© businesstoday 2012