Sindh Modaraba (PSX: SINDM) was set up under the Modaraba Companies and Modaraba Ordinance, 1980. It is managed by Sindh Modaraba Management Limited and is engaged in providing Shariah compliant financing facilities to customers.
Shareholding pattern
As at June 30, 2020, a little over 94 percent of total certificates are held under the associated companies, undertakings and related parties. This category solely includes Sindh Modaraba Management Limited. The local individuals hold a little beyond 5 percent certificates, while the directors, CEO, their spouses and minor children own less than 1 percent certificates. The remaining about 1 percent certificates is with the rest of the categories.
Historical operational performance
Since FY15, the company has only seen its income declining once in FY18. Despite this it was in FY18 that the company’s net margin jumped significantly and grew until the next year FY19, before falling again in FY20, despite the latter seeing the highest net profit in value terms.
During FY17, total income registered a 56.5 percent incline; while income from bank deposits doubled year on year in value terms, income from ijarah rental saw a 52.5 percent rise, and income from diminishing musharaka rose by 53 percent. With additional Rs 342 million disbursed in financing facilities, the total financing portfolio grew to Rs 632 million. with higher income, operating expenses made a smaller share in revenue, but the expense related with depreciation- ijarah assets, amounting to Rs 78 million- at the highest, resulted in a trimming of profits. So, while, net profit was higher in value terms at Rs 26 million, net margin had reduced to 19.5 percent, down from last year’s 24.7 percent.
The company witnessed a 33 percent decline in income during FY18; majority of this drop in earnings came from ijarah rentals that shrunk from Rs 90 million in FY17, to Rs 11 million in FY18. However, an additional Rs 8 million was brought in through term deposits receipts, making up for the lost revenue from bank deposits. Yet, the company was able to grow its total financing portfolio to Rs 721 million. With lower revenue, operating expenses made a larger share in revenue. Despite this, the company was able to double its profit year on year in value terms due to the absence of a significant expense- depreciation of ijarah assets. Thus, net margin jumped to 58.4 percent for the year.
Growth in income reverted during FY19 as it grew by over 40 percent year on year. While income from ijarah rental continued to decline, income from diminishing mushaira registered a 67 percent increase, while income from bank deposits and term deposits receipts together brought in an additional Rs 28 million. The higher income was primarily a result of an upward movement in discount rate by the State Bank of Pakistan. With other expenses remaining more or less similar, the increased income reflected in the net margin that grew to an all-time high of 64.8 percent.
FY20 began with a strict monetary policy in place, with rising interest rates, inflationary pressures and a general economic slowdown. The second half of FY20 saw the Covid-19 pandemic entering the country that led to a strict lock down, hence, an abrupt halt to trade and businesses, barring essential services. Despite this, the company managed to grow its income by 50 percent during the year, driven by income from diminishing musharaka that increased by nearly 11 percent, and income from bank deposits that witnessed 5 folds rise. However, given the development of Covid-19 pandemic situation, businesses were allowed deferment in payments to a certain extent, but it also meant provisions had to be made for some doubtful receivables. This additional expense that was not present historically, led net margin to decline to 57 percent, despite the growth in revenue. Yet in value terms, net profit was recorded at its highest of Rs 108 million.
Quarterly results and future outlook
Revenue during the first quarter of FY21 saw a 7.2 percent rise year on year, with majority of the income pouring through diminishing musharaka and bank deposits. This was attributed to an increase in average financing portfolio by Rs 131 million. However, net margin for 1QFY21 was lower than that in the same period last year due to hiring of key management towards the end of FY20 that increased expenses from Rs 8.3 million in 1QFY20 to Rs 12.5 million in 1QFY21.
Total income in the second quarter of FY21 declined quarter on quarter as well as year on year due to a reduction in policy rate by the State Bank of Pakistan. This resulted in a decline in average rate of return on financing that had an adverse effect on revenue. Expenses again were higher year on year due to hiring of management and inflationary pressures. This led to net margin during 2QFY21 being considerably lower than that in 2QFY20.
Similar trend was observed in the third quarter with cumulative effect of decline in income at 16.4 percent year on year due to decline in policy rate. Therefore, profitability was also between the two periods - 56 percent for 9MFY21 compared to 69.3 percent for 9MFY20.
With some positives for the economy such as increase in tax revenue and remittances, there also existed some risks such as inflation, rising Covid-19 cases and a more recent development of tax exemption for the sector. This has been opposed by the modaraba sector since it will adversely affect the development of the sector, without improvement in revenue.
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