Habib Metro Mod

Habib Metro Mod (PSX: HMM) is under the management of Habib Metropolitan Modaraba Management Company (Private) Limited, floated under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. It is engaged in Residual Value car financing model on diminishing musharaka basis, providing financing for solar power equipment’s and other related business.

Shareholding pattern

As at June 30, 2022, the associated companies, undertakings and related parties own 70 percent certificates. Within this category, majority are held by Habib Metropolitan Bank Limited. About 20 percent certificates are held under the category of “others”, followed by nearly 10 percent owned by the local general public. The remaining are with the rest of the certificate holder categories.

Historical operational performance

Between FY20 and FY22, the modaraba has witnessed a growing income twice, while in FY21, it contracted by 27.5 percent. On the other hand, operating margin has been fluctuating, while net margin grew between FY19 and FY20, before declining until FY22.

The modaraba commenced operations in late 2017, thus the financial statements for FY18 contains information for the nine months till June 2018. In FY19, the company witnessed the first full year of operations whereby it earned a total income of over Rs 29 million, majority of which came from diminishing musharaka financing. Its financing assets portfolio grew to Rs 168 million, yet the general economic slowdown prevented the modaraba from achieving its target growth. The increase in car prices discouraged auto-financing that led to slow disbursement for the modaraba. As it incurred expenses, its net margin stood at almost 38 percent.

Total income in FY20 grew by 72.5 percent to reach Rs 50.7 million in value terms. Again, majority of this growth came from diminishing musharaka financing that more than doubled year on year in value terms. But with the outbreak of the Covid-19 pandemic and the resultant dampened economic activity, the booking of financing assets shrunk to Rs 79 million. Financing assets size also remained stagnant due to higher car prices and discount rate. The higher revenue reflected in the year’s profitability as net margin was recorded at over 55 percent for the period.

In FY21, total income shrunk by 27.5 percent as income from diminishing musharaka, profit on Islamic certificates and profit on modaraba’s deposit accounts reduced. Profit on Islamic certificates was eliminated entirely as it reduced to zero. Despite this, the modaraba claims to have witnessed a rise in booking asset and booking size. The financing assets portfolio grew to Rs 285 million. The modaraba expects it to increase further. The loss in revenue that arose from lower discount rates is reflected in the bottomline that reduced to Rs 16 million, down from last year’s Rs 28 million. Net margin fell to over 44 percent. During FY19, the modaraba had introduced a new product, “Residual Value (RV) financing”. The rise in auto financing book during the current period hinted at the acceptability of Residual Value financing, however, penetration was lower than regular car financing.

In the third quarter of FY22, the board of directors decided to merge the modaraba with First Habib Modaraba amidst various economic challenges as well as the withdrawal of tax exemption for the sector. Regarding its financial position, its total income grew by over 31 percent, largely attributed to the growth in diminishing musharaka financing. During the period, the company was unable to increase its size of financing assets portfolio due to a challenging economic environment, high lending rates, higher prices of motor vehicles and long queue in car delivery by nearly every prominent variant. On the other hand, the improved revenue reflected in the bottomline that was higher year on year at Rs 18 million. Net margin, however, was lower at almost 38 percent, but this can be attributed to the taxation expense that had been absent for the last three years. Thus, if one were to look at profit before taxation margin, it had increased significantly to 52 percent.

Quarterly results and future outlook

Income in the first quarter of FY23 was nearly double year on year from Rs 8.9 million in 1QFY22, to Rs 11.8 million in the current period. This is again largely seen as a result of an increase in income from musharaka financing. However, other income had also increased by 3.6 times. Moreover, administrative expense was significantly lower as a share in revenue. Thus, there was considerable improvement in profitability year on year as net margin grew to almost 53 percent, from 32.8 percent seen in the same period last year. Bottomline was also three times higher in value terms at Rs 8.7 million.

The current economy is in a difficult stage as oil prices and prices of other commodities continue to push inflation. Internally too, the country is facing uncertainty on the political front, whereas globally, the Ukraine-Russia has had its own implications. Regarding the modaraba, the status of the merger between Habib Metro Modaraba and First Habib Modaraba is progressing and expected to be accomplished by the end of 2022.