First UDL Modaraba (PSX: FUDLM) was set up in 1991 under the Modaraba Companies and Modaraba Ordinance, 1980. It is engaged in providing finance on Murabaha and Musharaka arrangements, Ijarah, commodity trading, manufacturing, and trading of pharmaceutical products. The modaraba is managed by UDL Modaraba Management (Private) Limited.
As at June 30, 2020, nearly 44 percent of the total certificates were held under associated companies, undertakings, and related parties. Within this category, close to 19 percent certificates were owned by UDL Modaraba Management (Pvt) Limited, and a little over 13 percent by Mr. Khalid Malik. The local general public held 41 percent certificates, while the directors, CEO, their spouses and minor children owned nearly 6 percent. Of the latter, majority were held by the CEO, Mr. Shuja Malik.
Historical operational performance
Revenue for the modaraba has been fluctuating over the decade, while net margin has followed a declining trend. It peaked abruptly once in FY15, and declined sharply in FY19.
During FY17, total income for the modaraba increased by 28 percent, crossing Rs 200 million, majority of this was generated through its pharma business. this was due to continuous additions to the portfolio. In addition, it is also manufacturing products for a pharmaceutical company that is also adding positively to the income of the modaraba. On the other hand, share of ijarah operations and musharaka receivables continued to decline, but the loss in income here was more than compensated for by increase in income from pharmaceutical business. However, cost of goods sold for the pharmaceutical business increased to nearly 45 percent of the total income due to purchases and salaries expenses, while distribution expenses claimed a further 34 percent due to rise in conveyance expense. This kept profit margin from increasing, that went down to 14 percent, from over 19 percent in FY16, despite the double-digit growth in revenue.
By FY18, the company had decided to discontinue its pharmaceutical business, that contributed the biggest share to the total revenue. The rationale for discontinuation of operations was rupee depreciation and tax imposed on manufacturing activities of the modaraba. With the then economic environment, the company decided to cease operations. This resulted in total income for the year to drop to Rs 75 million, compared to Rs 224 million in FY17. With manufacturing operations halted, expenses related to it also disappeared. This led net margin to improve to 63 percent, if one were to not take into account the loss after taxation from discontinued operations that stood at Rs 54 million for the year.
After the pharmaceutical division, investments seemed to be the major contributor to revenue. But in FY19, investment income dropped to single digits, from Rs 48 million seen in FY18, due to bearish stock market; some Rs 10 million were brought in by rental property that was the highest contribution made towards revenue. Thus, total income fell to Rs 35 million. On the other hand, despite the discontinuation of pharmaceutical business, expenses in FY19 doubled year on year in value terms; this was primarily due to salaries expense. With the drop in revenue, the company incurred a loss of Rs 16 million that escalated to Rs 55 million due to loss from discontinued operations.
Revenue in FY20 saw some recovery as it grew by 8.6 percent year on year. This was on the back of diminishing musharaka and rental property; other sources also made an additional contribution of Rs 9 million towards the total income. The minimal change in revenue was due to the general economic slowdown in the country in the first half of the year, while the second half saw the Covid-19 pandemic that disrupted businesses. Hence demand for ijarah and diminishing musharaka financing remained low. It only picked up in the last quarter of FY20. Operating expenses remained nearly flat in value terms, thus the company incurred a loss of around Rs 3 million, compared to Rs 16 million seen last year.
Quarterly results and future outlook
Revenue in the first quarter of FY21 was nearly 29 percent higher year on year. With liquidation of its short and long term investments, cash flow of the modaraba improved. Most of the increase in revenue came from investments and other sources. With expenses remaining more or less similar, this helped to improve profitability for the period year on year.
Income in the second quarter of FY21 declined year on year, although it was higher than the first quarter of FY21. Profitability was also adversely affected for the quarter by operating expenses that made nearly 93 percent of total income. The third quarter of FY21 saw revenue rising significantly as per the expectations of the company. this was attributed to more assets, property and investment portfolio liquidated and channeled towards ijarah and diminishing musharaka. With operating costs remaining similar, it made a lower share of revenue, thus the company posted a cumulative profit of Rs 9.3 million for the nine months ended of FY21, compared to a loss of Rs 3 million in 9MFY20. It expects the trend to remain due to liquidation of assets and improved cashflow.