ORIX Modaraba

ORIX Modaraba (PSX: ORIXM) (formerly, Standard Chartered Modaraba) was established in 1987. is managed by ORIX Services Pakistan (Private) Limited; the latter is a wholly owned subsidiary of ORIX Leasing Pakistan Limited. Latter, together with ORIX Services Pakistan (Private) Limited (formerly, Standard Chartered Services of Pakistan (Private) Limited) owns 10 percent shareholding in ORIXM, thereby categorized as the associated companies of ORIX Modaraba.

The modaraba was formed under the Modaraba Companies and Modaraba Ordinance, 1980. ORIXM offers Ijarah/leasing, diminishing musharaka, Murabaha and Certificates of Musharaka

Shareholding pattern

A little over 50 percent of the certificates are held by individuals, while 18 percent are held under the financial institutions; of this more than half of the certificates are held by ORIX Services of Pakistan (Private) Limited. Close to 13 percent of the certificates are held by insurance companies, while 10 percent are with the modarabas and modaraba management companies. Directors, the CEO, their spouses, and minor children, collectively hold less than 1 percent of the certificates.

Historical operational performance

The company’s primary source of revenue is the ijarah rentals earned, although income on diminishing musharaka transactions is also gradually on a rise.

In FY15, the country saw some stability in terms of increase in foreign exchange reserves, decline in inflation and reduction in deficit. Coming to the company’s financials, income from ijarah rentals reduced, as well as from diminishing musharaka transactions which affected the total revenue for the year; it decreased by 11 percent. However, the reduction in expenses in terms of finance expense and depreciation on assets under ijarah arrangements exceeded the reduction in revenue, allowing profit margin to register a 7 percent increase.

In FY16, Pakistan’s economy grew modestly as exports dwindled. With textile sector contributing a major chunk to export revenue, in the event of a weak cotton harvest, weak international demand and export market limited to a few destinations, exports of the country suffered. Real growth of around 4.7 percent was supported by large scale manufacturing, construction activity and high private sector credit growth. Looking at the company’s financials in the prevalent environment, revenue from ijarah rentals reduced for a second time in a row. The two major expenses, finance, and depreciation on assets under ijarah arrangements both saw a decline in value terms. Yet profit margins failed to pick up due to “decreasing trend of discount rate”.

GDP growth rate recorded at 5.28 percent did not meet its targeted 5.7 percent in FY17. With weak exports, inability to face intense competition in the international market for a sector that contributes a huge chunk in export revenue, hopes were pinned with growth related to CPEC projects which might improve the otherwise low investment to GDP ratio. The company’s financial statements reveal that while revenue from ijarah rentals increased, income from diminishing musharaka transactions reduced. With further increases in administrative expenses and depreciation on assets under ijarah arrangements, profit reduced to its lowest seen in the last five years.

In FY18, GDP grew at 5.8 percent with supportive macroeconomic demand and supply policies, confidence in the private sector and fiscal discipline. However, challenges such as unfavourable balance of payments and a widening current account deficit remained. The company’s revenue, on the other hand, increased; both, ijarah rentals and income on diminishing musharaka transaction witnessed growth. However, due to rising finance expense, profit margin reduced year on year, albeit marginally.

During FY19, State Bank of Pakistan’s rapid and large movements in discount rate adversely impacted the industry’s spreads; the economy also experienced a slowdown. Income from ijarah rentals saw a decline while income from diminishing musharaka transactions more than doubled. This was accompanied by an almost doubling of finance expense as well, almost offset by a decrease in depreciation expense on assets under ijarah arrangements, keeping profit margins similar for the year.

Quarterly results and outlook

During 9MFY20, revenue from ijarah rentals decreased while income from diminishing musharaka arrangements continued to increase. Some revenue was also brought in by income on deposits with banks, which allowed profit margins to increase year on year. Latter was also supported by a decrease in depreciation on assets under ijarah arrangements.

The outbreak of Covid-19 brought the global economy to a halt with lockdowns in place. The closure of non-essential services and disruptions in domestic supply chain affected the wholesale and retail trade and transport. It is expected that exports will remain negative in FY21, while imports are to recover gradually. The fiscal deficit is expected to remain high in FY20 and FY21 before galling slowly by FY22. However, public debt to GDP ratio is projected to remain high with the country’s exposure to debt-related shocks remaining high.

The main risks of the pandemic to the company include asset quality and credit risk, liquidity management and operations. Securities and Exchange Commission of Pakistan (SECP) has allowed modarabas to defer clients’ payments of principal by one year among other relaxations.