corporate finance project on descon in pakistan

“With the name of Allah the most beneficial and the most merciful”

GROUP MEMBERS

Sana Ghayyur M-13366 Uzma Farrukh M-13395 Farah Ijaz M-13358 Zeeshan Khan M-13339 Suneel Younis M-13361 Qasim Chouhan M-13387 Sobdar Mazari M-13371

Corporate finance - 1 -

ACKNOWLEDGMENT

First and foremost, we are grateful to “Almighty Allah”, most beneficent and most merciful who made us able to complete our given project successfully.

We would also like to pay tribute to the benefactor of humanity ”HOLY PROPHET” (P.B.U.H), Who gave us complete knowledge of every aspect and fields of life

In short of words to express our modest gratitude and recognition to cuddly and loveable “Parents”, who at each and every moment prays for our success. We are also deeply thankful to our “Teachers” who have taught us from childhood to still.

Thank you all, without you this would have not been possible.


DEDICATION

To our “Parents” because of their sacrifices and continuous encouragement throughout our life, that made this enormous task possible……

To our “Teacher” who endured us and all “Group Members” who assisted each other at every step in the task of assembling this project.


“If you are not criticized, you may not be doing much” By, Donald H.Rumsfeld

“Fight for your opinions, but do not believe that they contain the whole truth, or the only truth” By, Charles A. Dana


Table or contents

Page #

Vision and Mission

Introduction

Corporate Governance Analysis

Stockholder’s Analysis

Risk and Return

Measuring Investment Returns

Capital Structure Choices

Optimal Capital Structure

Mechanics of Moving to the Optimal

Dividend Policy

Framework for Analyzing Dividends

Valuation


Vision and Mission

DOL’s vision is their destiny and long term corporate Goals. It outlines their capabilities, strengths and drives the strategic direction of organizational future. They have narrated the vision in such a way that it resonates through all members of the organization and helped them feel proud, excited and part of something much bigger than themselves.

DOL’s mission is target oriented and goes hand in hand with the Vision. It is a very clear and progressive statement that serves as beacon for all our staff members at various levels.

Their values are very clear to them and they represent an individual’s highest priorities and driving forces.

Vision:To become a leading chemical solution provider to industry worldwide.

MissionTo provide competitive solutions through technological innovation to form the basis of better life.

Core ValuesHonesty, integrity, and humanity.Open and candid environment.Commitment and team work.Encourage innovation and initiative.Recognition growth and respect for individual.Customer focus.Service to nation.


Introduction

Descon the mother company founded in 1981 with a title Delta Industries Pvt Limited, and then changed to Dawcham which is now Descon Chemicals Pvt Ltd, has expanded its product range ever since it’s in corporation with the manufacturing of Alkyd resin now its product range is over 200 products (alkyd resins, saturated and unsaturated polyesters, paper industries and textile chemicals). It started its new project with name of Descon Oxychem Limited (“the Company”) was incorporated in Pakistan as a private limited company on 12 November 2004 under the Companies Ordinance, 1984. The Company has been converted into a Public Limited Company with effect from 28 February 2008 as approved by Securities and Exchange Commission of Pakistan (SECP) vide letter No. ARL 16222 dated 14 March 2008. The registered office of the Company is situated at 18-KM Ferozpur Road, Lahore. The principal activity of the Company is manufacture, procurement and sale of hydrogen peroxide and allied products. The Company has not commenced commercial operations.

Effective from 15 September 2008 Company’s shares have been formally listed on Karachi stock exchange of Pakistan.


I. Corporate Governance Analysis

A. MANAGEMENT AND STOCKHOLDERS

Balance of Power:

At Descon Oxychem Limited the power clearly resides, with the incumbent management, and in particular, with the director/chairman Mr.Abdul Razak Dawood.This power emanates from the fact that the board of directors is composed almost entirely of Insiders and people who are close to Mr.Abdul Razak Dawood (see exhibit 1for a listing of the directors).

Insiders (current at descon Oxchem) hold six of the seven positions on the board.


EXHIBIT 1

Board of Directors:

Mr.Abdul Razak Dawood Director/ChairmanMr. Muhammad Nabeel Arif Director/Chief Executive OfficerShaikh Azhar Ali DirectorMr.Taimur Dawood DirectorSyed Zamanat Abbas DirectorMr. Muhammad Sadiq DirectorMr. Faisal Dawood Director

B. Firm and Financial Markets:

Descon is a well-followed firm. While the Firm provides substantial amounts of information about itself in form of earnings reports, there is a substantial amount of information that is available about the firm from external sources. Both facts would lead us to expect less bias in the information that is available about the firm.


C. Firms and Society

Companies need to answer to two aspects of their operations. 1. The quality of their management - both in terms of people and processes (the inner circle). 2. The nature of, and quantity of their impact on society in the various areas.

Social responsibilities of Descon Oxychem Limited is about capacity building for sustainable livelihoods. It respects cultural differences and finds the business opportunities in building the skills of employees, the community and the government


Financial Performance: Descon Oxychem Limited is socially responsible which results in positive financial performance. It’s ethical corporate behavior directly affects the stock prices.

Slide in Operating Costs DOL’s environmental stewardship and workplace safety initiatives help improve work place practices, and processes, reduce wastes, and resource consumption. Thus they improve productivity and reduce costs. Enhancement of social standards and benefits result in employee retention which saves hiring and training cost and increase profit by improved productivity through stable work force.

Brand Image and Reputation Descon Oxychem Limited with good image and clearly defined strategy on corporate social responsibility attract a large number of customers. It is socially responsible organization which can benefit from its good reputation amongst its customers and is also recognized as a respectful entity in their business community. Increasing their ability to attract investment and trading

Productivity and Quality Enhancement

Descon Oxychem Limited invests in the working conditions and environmental friendly atmosphere and also involves the employees in decision making tend to have an increase in productivity. Employee loyalty and dedication results in effective man hour utilization and hence increase in quality.


II. Stockholder Composition

A. Average And Marginal Investors To analyze Descon’s stockholders, we began with an analysis of who

the stockholders are at the firm. The pie chart breaks down the stock holdings in Descon Oxychem Limited into mutual funds, other institutional investors (pension funds), individual investors and insiders.

Breakdown of stockholder

AssociatedCompanies

Directors

Inidividual

Mutual Funds

Most of these investors are still domestic investors, though they may be diversified into other markets. Finally, Descon Oxychem’s


stockholdings are fairly dispersed. The largest investor, Mr. Abdul Razak Dawood owns about 15.43% of the outstanding stock.

The following table lists out the 10 largest stockholders in Descon Oxychem Limited.

Holder Shares Owned

% of Descon Oxychem Limited

Mr. Abdul Razak Dawood

10,781,250 15.51%

Individuals 10,722,000 15.43%Descon Chemicals (Pvt) Limited

10,062,300

14.48%

Descon Corporation (Pvt) Limited

8,725,250

12.55%

Descon Engineering Limited

7,500,000

10.79%

Mr. Taimoor Dawood 5,644,500

8.12%

Mr. Faisal Dawood 5,644,500

8.12%

Directors spouses and minor children

4,439,500

6.39%

IGI Investment Bank Limited

4,000,000

5.76%

Descon Holding (Pvt) Limited

1,953,200

2.81%

Conclusions:

In conclusion, these facts suggest that:

The average stockholder in Descon Oxychem Limited is an individual investor, more likely to be a pension fund than a mutual fund.

Since no stockholder is large enough to dominate the holdings so the marginal stockholder is likely to be the director/chairman, Mr. Abdul Razak Dawood.


III. Risk Profile

Overall Risk Profile

DOL — Descon Oxychem Limited

Last Trade 11.83 ( 0.54) Day's Range 10.99 - 12.05Trade Time Apr 03, 2009 Volume 1,387,000Previous's Close 11.29 ( 0.99) Previous's Range 10.50 - 11.30Avg Volume (3M) 518,175 3M Range 5.49 - 12.05P/E N/A 1Y Range 5.49 - 12.05EPS N/A Dividend N/AHighest 12.05 (on Apr 03, 2009)Lowest 5.49 (on Feb 11, 2009)

To analyze the risk profile for Descon Oxychem Limited, we begin with a plot of DOL weekly stock prices and earnings over the last 3 months. Both DOL’s stock prices and earnings have been on an upward


path over the period. The maximum stock price of DOL was Rs.12.05 as on April 03, 2009, and the minimum stock price of DOL was Rs. 5.49 as on February 11, 2009.

RISK FACTORS

The following risk factors which may affect the returns on the investment in the Company should be considered carefully before making any investment decision:

A. COMPANY SPECIFIC RISKS:

(a) INABILITY TO ATTRACT THE MARKET

This risk relates to the inability of the Company to attract customers towards the product. H2O2 is used in a number of industries such as textile, paper and board, leather, food, pharmaceuticals, etc. At present, there is only one local manufacturer of the product, Sitara Peroxide Limited, with an installed capacity that is not sufficient to meet local demand. The increased availability of locally produced hydrogen peroxide will encourage smaller manufacturers to consume the product. This would allow a greater segment of industrial consumers to reap benefits from consumption of H2O2. Additionally, it will also act as a catalyst in facilitating import substitution thereby reducing the import bill of the country.

With Descon Chemicals and Nimir Resins providing over 100 chemical products to the paper and textile industries, these companies have close relationships that DOL can leverage on. Descon Chemicals and Nimir Resins are supplying chemicals that are used in association with hydrogen peroxide in various processes. Therefore, DOL will find a ready market for its product within the existent customer base of these companies. Furthermore, DOL management also has arrangements with industry leaders, ensuring supply of H2O2 for their usage.


(b) CONSTRUCTION RISKConstruction risk relates to the Company not being able to install

the plant & machinery and/or construct building/offices for the project within the specified time period.

The construction risk has been mitigated by engaging Descon Engineering Limited and JGS Descon Limited for complete installation of the plant.

(c) OPERATIONAL RISK This is the risk that DOL might not be able to sustain production

and/or quality in the long term or might not be able to engage qualified and competent personnel. This risk is mitigated by the fact that the sponsors bring with them considerable experience in the chemical sector. DOL signed an agreement with Chematur Ecoplanning Oy for delivering the basic and detail engineering design of their licensed hydrogen peroxide. Chematur will also provide supervision for the commissioning of the plant and is responsible to deliver the agreed quality and production capacity as backed by a process guarantee, hedging DOL's risks. DOL has been given the exclusive license to be the sole operator of Chematur technology in Pakistan. Chematur has provided a performance guarantee to assure DOL of its obligations under the Supply Contract. Chematur has a total liability of 15% of the total contract amount which will remain outstanding throughout the construction period. The performance guarantee covers the capacity, quality and raw material consumptions under the contract.

In addition to this, DOL has inducted a group of highly trained professionals having relevant experience to manage the project. The team has been working on the project since its inception. The average technical / management experience of the senior executives of DOL is over 20 years with renowned companies worldwide.


(d) REGULATORY RISK

Regulatory risk relates to uncertain government policies affecting the industry in the future. Changes in the regulatory framework can greatly influence the performance of any sector. It is expected that in order to support this new industrial segment and to promote local production of H2O2, the GOP may enforce favorable regulatory frame work and help support the industry which in return assist the Government to reduce import bill.

(e) ECONOMIC SLOWDOWN

The growth of the H2O2 industry is dependent upon the economic conditions prevailing in the country, as the product is used by various sectors of the economy. The success of this industrial segment is correlated to the success and growth of other industries as well.

Pakistan's economic environment has improved considerably in recent years mainly due to the Government of Pakistan's political and economic reform initiatives. These initiatives have focused on macroeconomic stability and have included the deregulation of industries, tax reforms, interest rate rationalization, trade liberalization and promotion, proactive fiscal and debt management and the successful privatization of several state-owned commercial enterprises. Most recently the country has witnessed economic slowdown mainly due to political unrest which is expected to normalize in the near future and we expect the economy to return back on track post this transitional phase.

(f) COMPETITION RISK

The profitability of Descon Oxychem Limited may be affected due to risk of increasing competition from other domestic companies.

Descon group over the number of years has established market reputation and is well positioned in the chemical and allied industries. Presently there is only one local producer of H2O2 in the market and demand is met through imports. Descon Oxychem is expected to replace or reduce import share due to price differential.


POWER

i. ELECTRICITY

Shortage in the supply of electricity can adversely affect the production capacity of the plant. The plant facility includes a 132 KVA Grid for H2O production that has been provided by Lahore Electricity Supply Corporation (LESCO). It is supported by a stand-by generation system with a capacity of 1,250 KVA. The Company does not foresee any problem to ensure year round availability of the power requirements.

ii. NATURAL GAS

Inflation and interruption in the gas supply can have a negative impact on the production and selling price of H 2O2. In order to mitigate this risk, the Company has entered into a gas supply contract with Sui Northern Gas Pipeline Limited (SNGPL). As per the agreement SNGPL will supply gas at the rate of 83.4 MCF/hr for a period of 3 years (on roll over basis).

(g) TECHNOLOGICAL OBSOLESCENCE

The Company's profitability can be adversely affected by potential obsolescence of DOL's process technology and also due to second hand plant. In this regard, it is noteworthy that the technological advancement in the H2O2 industry comes after long intervals and this technique of producing H2O2 has been considered the best so far and procured from the industry leaders providing such services for many year also the second hand hydrogen plant has been designed by Howmar International UK having a capacity of 1,700 Nm3/hr.

SGS UK has inspected and confirmed the operational efficiency of this plant before its shipment to Pakistan and estimated 10 years useful life for this plant.


B. INSTRUMENT SPECIFIC RISK

(a) UNDER-SUBSCRIPTION RISK This is the risk that the IPO may get under subscribed on account

of lack of investor interest. The IPO of DOL is for 32.5 million shares at par value (PKR 10/- per share).

Given the sound financial performance, vast experience and reputation of the Group, the future prospects of this new venture are reasonably bright. Therefore, the probability of under subscription of the IPO of DOL is low. The Company will receive the funds from the IPO in its entirety even in the case of under subscription, as the IPO is fully underwritten.

(b) PRICE RISK Price risk refers to the share price performance, once listed.In recent times, Karachi Stock Exchange has seen volatile trends;

however, the risk is mitigated by the zero premiums being charged on the offering.

(c) LIQUIDITY RISK The investors assume the risk that they will not be able to sell the

ordinary shares in the secondary market without adversely affecting the market price.

Ordinary shares are proposed to be listed on the Karachi Stock Exchange which would enable the investors to undertake secondary market trading.

Values of firm:-

Value of firm = 1718896249Value of debt = 1038153846Market value of equity =695000000


DOL’S WEIGHTS FOR DEBT AND EQUITY

Using the market value of debt and equity, we estimate the following weights for debt and equity in the capital structure calculation.

Equity ratio = 0.39Debt ratio = 0.60Rdebt = 0.10Requity = 0.125

DOL’S COST OF CAPITAL

= rdebt (debt ratio) + requity (equity ratio)

= 0.10 (0.60) + 0.125 (0.39)

= 0.06 + 0.049

= 0.109 or 10.9 %


IV: Measuring Investment and Returns

THE PROJECT:

The hydrogen peroxide plant being set up by DOL is a fully automated DCS controlled production facility for all product variants of H 2O2. It has an installed capacity of 30,000 MTY on the basis of 50% concentration output. The complex mainly consists of a) Hydrogen Plant and b) H2O2 Plant. Process technology, knowledge, license and commissioning supervision is being provided by Chematur Ecoplanning Oy Finland, (Group Company of Chematur Engineering, Sweden). Other contractors include Descon Engineering Limited (responsible for fabrication of major plant equipments and also responsible for complete civil, mechanical and electrical construction/installation of the plant) and JGC Descon Engineering (Pvt) Limited (responsible for complete detailed engineering, issuance of drawings for construction and arrangement and technical approval of all equipment being procured for the project).


PROJECT LOCATION: The project is being set up on 28 acres of freehold land on 18km Lahore Sheikhupura Road. The location is in proximity with major industrial clusters of Punjab and ideal with respect to transporting raw materials and finished products

PROJECT COST AND SOURCE OF FINANCING:


The total cost of the project is estimated at PKR 2,490 million which will be financed in debt equity ratio of 59:41. The sponsors have injected PKR 503 million as equity while PKR 192 million has been raised through pre-IPO placement. The remaining equity portion of PKR 325 million will be raised through IPO.

Equity Financing:


The Company has raised equity of PKR 695 million comprising of Sponsors contribution (PKR 503 million) and Pre-IPO placement (PKR 192 million). In addition to this, the Company will raise PKR 325 million through the IPO.

Debt Financing:

Syndicate Term Finance

PLANT AND MACHINERY:

The cost of the total plant and machinery comprising of local and imported machinery is PKR 1,383 million. Plant and Equipment costs include procurement of process plant, auxiliary equipment and arrangement of utilities. Chematur Ecoplanning Oy Finland (Group Company of Chematur Engineering Sweden) has delivered detailed engineering of the licensed H2O2 Plant and will also assist in the commissioning of the plant. The construction of H2O2 plant equipment is being done by Descon Engineering Ltd which is also responsible for the erection and pre commissioning activities of Hydrogen plant and H2O2

plant. As per the project scheduling document and the verification carried out by independent consultants 54.56% of the plant and machinery has been installed till April 30, 2008, the mechanical installation is expected to be completed by July 31, 2008. Breakdown of local and imported machinery and equipment is as follows:


IMPORTED:

All imported plant & machinery (except the hydrogen plant) is brand new and has been purchased at the most competitive rates from a number of international suppliers. The second hand hydrogen plant has been designed by Howmar International UK having a capacity of 1,700 Nm3/hr. SGS UK has inspected and confirmed the operational efficiency of this plant before its shipment to Pakistan and estimated 10 years useful life for this plant. Complete details of imported plant and machinery are given below:


payment. As of 30th April, 2008 approximately 46% of plant and machinery has been purchased while LCs of remaining 54% have been established by the Company. However LCs for less than 1% of the imported plant and machinery are yet to be opened as at 30th April, 2008.

LOCAL:

Besides imported machinery, the project also constitutes locally manufactured equipment, all of which is brand new and bought at competitive rates. The Company has already incurred 36% of the projected cost of local plant and machinery as on 30th April, 2008 while the remaining is expected to be completed by 31st July, 2008 as confirmed by he contractor Deson Engineering Limited vide its letter dated 19th May, 2008. Details are as follows:

CIVIL WORKS: Building and structure cost includes civil design and civil works for development of the Project which amounts to PKR 233 million. All the civil work has been awarded to the construction contractors. As of April 30 th, 2008, approximately 69% of civil work has been completed and remaining is expected to be completed by July 2008.


FACILITIES AND UTILITIES:

Power

The plant facility includes a 132 KVA Grid for H2O2 production that has been provided by Lahore Electricity Supply Corporation (LESCO). It is supported by a stand-by generation system with a capacity of 1,250 KVA sufficient for uninterruptible supply of electricity to the plant. The Company does not foresee any problem to ensure year round availability of the power requirements.

WaterWater requirements of the plant will be met through tube wells installed on the factory site. The Company has constructed a large water reservoir at the premises which will provide adequate water storage facilities for manufacturing of H2O2.

Raw MaterialThe Company has entered into a gas supply contract with Sui Northern Gas Pipeline Limited (SNGPL) to fulfill its gas requirement of 83.4 MCF/hr. In addition to this, the hydrogen plant has a cylinder storage capacity to store gas for 4 days of production. As per the agreement SNGPL will supply gas at the rate of 83.4 MCF/hr for 3 years (on roll over basis).

PROJECT IMPLEMENTATION SCHEDULE:

Activity Completion Date

Acquisition of Land AcquiredCivil Work July 2008Completion of Arrival of Machinery End of July 2008Completion of Erection / Installation End of July 2008Plant Commissioning August 2008Trial Production October 2008Commercial Production December 2008


TARGET MARKET AND SALES STRATEGY

The product will be distributed in different sized containers, making it readily available to small scale consumers as well as large manufacturers. DOL will distribute its product in large tankers as well as smaller drums. This will allow the Company to distribute its product to all types of consumers.

The management of Descon Oxychem Limited has strong relationships with various industry leaders in sectors that are the key demand drivers of their product, including the textile and paper industries. As part of its organizational structure, DOL has created a separate department solely for the purpose of marketing. The Company has already started to market its product to other large scale industries and has received a positive response.


] Assessments for the Future:

We believe that the Descon Oxychem Limited, Hydrogen Peroxide Project is likely to continue generating surplus value into the future, because of several barriers to entry, including:

DOL’s strong brand name value is likely to allow them to earn higher margins and maintain healthy returns on capital into the future.

The bulk of the investment, in the Hydrogen Peroxide Project, has been made already. DOL will continue to enjoy the benefits of this investment in the form of earnings.

The potential for excess returns in the Hydrogen Peroxide Project division will continue to be greater for Descon Oxychem Limited (where the brand name counts).


V. Capital Structure Choices

Current Financing Mix:

PROJECT COST AND SOURCE OF FINANCING: The total cost of the project is estimated at PKR 2,490 million which will be financed in Debt equity ratio of 59:41. The sponsors have injected PKR 503 million as equity while PKR 192 million has been raised through pre-IPO placement. The remaining equity portion of PKR 325 million will be raised through IPO.

.


Trade Off on Debt versus Equity:

Looking at the advantages and disadvantages of debt, and DOL’s specific characteristics yields the following:

Factor Descon Oxychem Limited

Tax Benefit Descon Oxychem Limited has no taxable income in the current year so is tax exempt.

Added Discipline of Debt

Descon Oxychem Limited is a widely held firm. While institutional stockholders own a significant percentage of the firm, no individual stockholder or institution is large enough to have much say in management. The firm has significant cash flows and should gain from the use of debt.

Bankruptcy Risk Some of DOL’s earnings are volatile, but a significant portion of the cash flows are stable. The bankruptcy risk should be low, given this factor and the size of the company

Future Flexibility The need for financing flexibility is increasing as the business needs changes technologically and becomes more global.

A Qualitative Judgment:

Based upon this trade off, we would expect Descon Oxychem Limited to have significant debt capacity. It has potentially large benefits from debt — tax benefits and added discipline — and has the cash flows to sustain the debt without significant bankruptcy and agency costs. DOL’s current debt ratio is probably low.


VI. Optimal Capital Structure

OPTIMAL DEBT RATIO:

Based upon the current cost of capital DOL’s current/existing debt ratio is its optimal ratio. If we compare DOL’s debt with the sector and market, we came to know that the comparison from sector our debt is normal but if we compare it to market ratio then the company’s debt ratio is slightly higher.

CONSTRAINTS: Keeping in mind market and economy constraints we would like to recommend the DOL to minimize their debt ratio as this year ‘2009’ is proved to be the toughest year from business concerns, all the economy conditions become more worst than the expectations so, DOL should also consider this factor and try to minimize their debt ratio from 60% to 50% or 48%.


VII. Mechanics of Moving to the Optimal

Due to economy’s worst conditions the firm is unable to get its optimal debt ratio. Current debt ratio of Descon Oxychem Limited is 54.4:41.6 and it is suggested by the CFO of the company that they will try to reach to the optimal debt ratio gradually overtime by following the strategy as decided in the last board meeting that they will after their existing mix (buy back stock or retiring debt) and achieve a more to the optimal. For this purpose they are using long term financing in PKR.

A Path to the Optimal:

The Right Financing For Descon Oxychem Limited

Project Cash Flow Characteristics Type of Financing

Projects are likely to be long term

have cash outflows are primarily in PKR but cash inflows could have a substantial foreign currency component (because of overseas sales)

have net cash flows which are heavily driven by the success of Hydrogen Peroxide Project.

Debt should be long term

mix of currencies


VIII. Dividend Policy: The Trade Off

DIVIDEND POLICY:

The rights in respect of capital and dividends attached to each share are and will be the same. TheCompany in general meeting may declare dividends but no dividends shall exceed the amount recommended by the Directors.The Directors may from time to time pay to the members such interim dividends as appear to the Directors to be justified by the profits of the Company. No dividends shall be paid otherwise than out of the profits of the Company for the year or any other undistributed profits. No unpaid dividend shall bear interest or mark-up against the Company. The dividend shall be paid within the period laid down in the Ordinance.

DIVIDEND HISTORY

The Company has not paid any dividends since its incorporation.

ELIGIBILITY FOR DIVIDEND

The Company in this matter will follow the provisions of Section 92(2) of the Ordinance, which reads as under:

"The new shares issued by a Company shall rank pari passu with the existing shares of the class to which the new shares belong in all matters, including the right to such bonus or right issue and dividend as may be declared by the Company subsequent to the issue of such new shares."

DEDUCTION OF ZAKAT

Income distributed will be subject to the deduction of Zakat at source pursuant to the provisions of the Zakat and Ushr Ordinance, 1980 (XVIII of 1980).


WITHHOLDING TAX ON DIVIDENDS:

Profit distribution to the shareholders will be subject to withholding tax at source under Section 150 of the Income Tax Ordinance, 2001 at the rate of 10% as specified in Part I, Division III of the First Schedule to the said Ordinance. In terms of the provision of Section 8 of the said Ordinance, said deduction at source, shall be deemed to be full and final liability in respect of such profits except in case of a Company.

EXEMPTION FROM CAPITAL GAINS:

Capital gains derived from the sale of listed securities are presently not liable to income tax, pursuant to Clause (110) of Part 1 of the Second Schedule of the Income Tax Ordinance, 2001. This exemption is presently available up to the income year ending June 30, 2010.

DEFERRED TAXATION:

Deferred tax is provided in full using the balance sheet liability method, on all temporary differences arising on differences between carrying amounts of assets and liabilities in the financial statements and their corresponding tax bases. Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unsued tax losses and tax credits can be utilized.

Deferred tax is calculated at the rates that are expected to apply to the period when the differences reverse based on tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the profit and loss account, except in the case of items credited or charged to equity, in which case it is also included in equity.

The Company has made no provision for deferred taxation up till February 29, 2008.


CAPITAL VALUE TAX ("CVT") & WITHHOLDING TAX ("WHT") ON SALE/ PURCHASE OFSHARES:

Pursuant to the provision of Section 233(A) of the Income Tax Ordinance, 2001, and Capital ValueTax (Finance Act 1989), the following charges have been made on sale/purchase agreement:

(a) 0.02% CVT will be charged on purchase of all shares, modaraba certificates, and instruments of redeemable capital as defined in the Ordinance.

(b) 0.01% WHT will be charged on sale of all shares, modaraba certificates, and instruments of redeemable capital as defined in the Ordinance.

By analysis of the firm’s financial characteristics we would like to recommend the company, Descon Oxychem Limited to return the cash to their stockholders, based on the assumption that they are having excess of cash; in shape of more likely to be equity buyback and then spun off their assets.


Dividends

IX. Dividend Policy: A Framework

Karachi Currency: PKR

Price11.050 Change-0.010

% Change-0.090

Bid11.030 Ask11.140 Open11.200

Volume1,760,500

High11.690

Low10.850

52-Wk High15.900(07/31/08)

52-Wk Low5.490(02/11/09)

1-YrReturnN.A.

Shares(Millions)102.000

Market Cap(Millions)1,127.100

EarningsN.A.

Price/EarningsN.A.

RelativeP/EN.A.

ROEN.A.

Last DividendReportedN.A.

Dividend Yield(Trailing 12mo.)N.A.

Rel. DividendYieldN.A.

90-DayVolatilityN.A.

Betavs. KSE100N.A.

Price for DOL:PASECTOR COMPARATIVE RETURNS

Chart the Performance of DOL:PA DOL:PA KSE100:IND


http://www.bloomberg.com/apps/quote?ticker=KSE100:IND

http://www.bloomberg.com/apps/cbuilder?ticker1=DOL%3APA

Company Industry Sector S&P 500

Dividend Yield

-- 0.06 0.13 3.00

Dividend Yield - 5 Year Avg.

-- 1.36 1.26 1.98

Dividend 5 Year Growth Rate

-- 13.11 20.87 11.85

Payout Ratio(TTM)

-- 1.45 3.18 48.13

Factor Implications for Descon Oxychem Limited

Stockholder Tax Preferences Given its history as a stock with low dividend yields, stockholders are much more likely to be attracted to capital gains than dividends.

Equity Buybacks

Information Effects and Signaling Incentives

Descon Oxychem Limited is one of the more heavily followed stocks in Pakistan. It should not have to increase dividends to attract attention or send signals about future cash flows.

Effect on Flexibility The technological changes in the industrial sector and uncertainty about global expansion needs increase the need for flexibility and are likely to work against paying more in dividends.

Bond Covenants and Ratings Agency Concerns

Neither is likely to be a serious impediment to Descon Oxychem Limited raising dividends


Overall, the factors suggest that DOL, if it wants to return cash to its stockholders, would be better off returning cash to stockholders in the form of stock buybacks rather than dividends.

X. Valuation

By analyzing the financial condition and growth of the company I (group) would choose to relay more on cash inflows from financing activities for discounting purpose of firm .And by analyzing other projects and their returns and performances of the mother company “Descon” it is fully hopped that this project will also turn into high returns and perform more efficiently and effectively then expectations and will beat the competitors with high margin .DOL’s total equity’ value is rs.680742403. Key variables that worked out in driving this value are risk and profit margin of the firm. If I (group) was hired to enhance value of the firm, the first step I (group) would take is probably reduce their debt to equity ratio as economy conditions are changing dramatically, a flow of continuous ups and downs is there inflation rate is changing accordingly too so our major portion of profit will used in paying off interest. If we instead of using debt rely more on our equity it will definitely enhance the value of DOL.

And we wish them a very best of luck for a bright, healthy & profitable future.


corporate finance project on descon in pakistan

Documents

dana corporate finance

public limited company

private limited company

mother company

abdul razak dawood

missiondols vision

long term corporate

descon oxychem