Leasing: ORIX LEASING COMPANY - Analysis of Financial Statements Financial Year 2004 - Financial Year 2008
Orix Leasing Pakistan Limited (OLP), is a subsidiary of ORIX Corporation, Japan's leading integrated financial services company spread over 24 countries. OLP was incorporated in Pakistan as a private limited company on July 1, 1986 and was converted into a public limited company on December 23, 1987. It is listed on all the three stock exchanges of the country.
OLP is one of the leading leasing companies in Pakistan, following the footsteps of its Japanese parent has played a major role in the leasing industry in Pakistan. OLP's main business activity is leasing of moveable assets. Its strength lies in an extensive branch network, a diversified portfolio of clients, and a wide range of financial products, personnel development and business automation.
OLP extends lease facility to all segments of the market. However, its market target remains small to medium-sized companies, spread across different manufacturing and service sectors including textile, sugar, cement, pharmaceutical, engineering, energy, food, paper and board, financial services and distribution. Being the first leasing company to enter this segment of the market, OLP understands the needs of its niche market and has been able to achieve a high degree of risk diversification.
While lease financing remains the core business, ancillary financial services have also been added to OLP's product range. These include auto leasing to salaried employees, self-employed professionals and businessmen, factoring receivables, working capital to SME sector, short term rental of diesel and gas generators on operating lease, micro-credit, agri-lease and point of sales network for processing debit, credit, loyalty and prepaid cards. OLP also offers attractive Certificates of Investments to both individual and companies.
OLP has successfully applied its innovative strength to its fund raising ability. Efforts to diversify sources of funding have been successful and support of local financial institutions and banks is increasing in recognition of the company's financial strength and sustained growth.
OLP enjoys good relations with the ORIX Group, enabling it to capitalize on the expertise of other group companies. OLP also contributes to the group by referring business and investment opportunities in Middle East, North Africa and Central Asia regions and has actively participated in establishment of five overseas and one local company in Pakistan.
OLP has strategically located branch offices throughout Pakistan that make it easy to provide quality service to its broad client base and access the small and medium-sized ticket market effectively. OLP serves as the regional headquarter for ORIX Group operations in the Middle East.
FINANCIAL PERFORMANCE (FY04-FY08)
The year 2008 was plagued with highly disrupting economic activity. Due to the economic conditions all over the world, particularly the event of rising oil prices and economic crunch in the US, the economic activities of our country also suffered a blow. In the leasing sector, the main adverse affect of such times was that these conditions raised the funding costs, thereby hampering the business activities and net revenues of the leasing companies. Also, the severe political conditions of the country and the uncertain law and order situation prevailing throughout most of the year, business activities for the leasing companies were slowed down, particularly in Mingora, Hyderabad, Karachi, Islamabad and Rawalpindi, causing them losses in terms of profits, receivables and disbursements.
On account of these conditions, Orix Leasing Company was able to declare a profit before tax of Rs 352 million as compared to the profit before tax of Rs 396 million last year, having a decrease of around 11%. The loans/disbursements for the year were around Rs 10.8 billion as compared to Rs 12.2 billion from last year, again showing a decrease of 11.5%. The net receivables of the company during the year were of Rs 23.5 billion, which were slightly higher from last year's amount of Rs 23.2 billion.
The company operations are broken down in the percentages of corporate leases comprising 70% of the company's lease portfolio whereas auto and consumer finance for individuals accounts for the balance 30%. Within the corporate lease portfolio, highest exposure of 10.82% is to transport and communication sector followed by services at 10.33% thereby ensuring diversity in both product and sector exposure.
Total revenues of the company were at Rs 3.45 billion as compared to Rs 3.01 billion from last year, showing an increase of around 15%. Finance lease remained the core business activity for the company, having revenue of Rs 2.38 billion as compared to Rs 2.17 billion from last year, and comprising of 70% of the company's total revenues. Operating lease revenues were slightly higher at Rs 535 million from Rs 501 million of last year with an increase of 7%. The increase was mainly due to increased deployment of the company's generator inventory and higher e-business revenues from point of sale network for processing credit, debit, fleet and loyalty card transactions for clients. The administrative and general expenses of the company rose around 23% to Rs 517 million as compared to Rs 420 million from last year, with inflation being the main reason. Direct cost of leases remained tat the same level of last year to Rs 343 million (2007: Rs 340 million).
The financial charges for FY08 stood at Rs 2.13 billion from Rs 1.81 billion of last year, showing a high rise of 18%. This rise was due to the company's recent policy to enhance its long term borrowings to strengthen the current ratio and ensure financial stability for difficult economic conditions, thereby increasing the higher borrowing from Rs 16.8 million in last year to Rs 17.4 million in 2008. The rising interest rates coupled with the higher borrowing has resulted in the increase in borrowing costs which has led the company to increase the net provisions to Rs 105 million (2007: Rs 51 million) for potential lease and loan losses.
A bigger lease portfolio together with improved lease rates was instrumental in achieving good revenue growth. Operating lease revenues were 7% higher at Rs 535 million (2007: Rs 501 million). Operating lease assets consist mainly of generators for short term rentals and a point of sale network. A fleet of 93 well maintained generators ensures uninterrupted power supply for clients. On account of the above mentioned reasons the PAT of OLP declined by around 20% compared to SPLY. As a result both net and gross profit margins registered a negative trend.
Both ROE and ROA declined in 2008 due to declining profitability. However ROE declined more sharply than ROA due to lower proportionate increase in equity base than in assets base with the same numerator that is PAT as shown by the low percentage increase in equity base of 2.32% as compared to 10.07% increase in asset base.
The income to expense ratio has also declined from 1.3 in 2004 to 1.1 in 2008. This is mainly due to higher disbursements in the subsequent years, showing that the declining ability of OLP able to cover its expenses by higher revenues. In FY08 though we saw a decrease in disbursements, yet the ratio fell due to an increase in expenses, particularly interest expenses, faced by the company due to higher borrowings.
The liquidity position of OLP though declined after 2003, has also improved slightly with current ratio rising to 1.1 in FY07 compared to previous years. In FY08, the ratio improved highly due to higher borrowings taken by the company for the purpose of increasing liquidity and strengthening its financial position. Though the ratio is showing OLP's increased ability to meet its short term liability via its current assets. However, it will have its consequences in terms of higher interest charges and raised interest rates causing the expenses of the company to rise.
All the debt management ratios indicate OLP's increased reliance on debt financing compared to equity financing. D/E ratio has increased overall from 2004 and continued the same trend in 2007 due to increase in long term loans. This is further confirmed by the long term debt to equity ratio which has increased in 2007. In 2008 the D/E ratio fell due to the low growth in debts as compared to equity, showing the company's efforts to decrease in debts. But the major decrease in debts were in the current debts, as during the year the company raised its long term loans by a huge borrowings, hence raising the long term debt to equity ratio from 3.9 to 5.6, showing an increase much higher than those of previous years.
D/A ratio also follow a trend similar to D/E till 2008 due to above mentioned reasons, also showing a slight decline in 2008 as similar to D/E. However, compared to D/E it has remained almost stable and has not shown sharp increases as D/E. TIE ratio has plummeted in 2006 due to lower EBIT coupled with high financial charges in 2005 after being flat in 2005. In 2005 the ratio remained flat due to almost equal increases in EBIT and finance costs.
In FY07, TIE again declined as financial charges increased by 41%. Similarly, in FY08, TIE fell due to higher growth in financial charges compared to growth in EBIT, caused by increased borrowing by the company, raising it from Rs 1,806 million to Rs 2,133 million. Higher finance costs are attributable to enhanced level of borrowings to support a larger lease portfolio and increase in interest rates. Hence one can say that OLP needs to work hard in improving its interest covering ability.
The EPS has remained almost constant hovering between 4.4 and 4.8 from FY04 to FY07 (except in 2005 when it rose to 5.7), but in FY08 due to lower profits of the company the EPS fell to 3.8. Year-end market prices of OLP have been declining till 2006 but rose again on 2007 as shown by the trend line. But in 2008, it fell again due to the poor economic conditions affecting the stock markets. Hence, the P/E ratio followed an overall declining trend till 2006, but rose in 2007 and 2008 driven mainly by the effect of declining earning per share and declining market prices for 2008. The P/E ratio of OLP is relatively higher than other companies in the leasing sector, reflecting the investor's confident in OLP.
As evident from the DPS trend, the company did not skip dividend during any of the years. The company proposed a cash and bonus dividend of Rs 3.00 per share for 2008. The regular and attractive dividend distributions to its prime stakeholders - shareholders coupled with a decent BV/share, shows maximization of shareholder's wealth as a prime objective of OLP.
FUTURE PROSPECTS
In today's business environment, when customized financial solutions and personalized services make a difference, Orix by virtue of its resources, expertise and experience is the leasing company that leads from the front and delivers total customer satisfaction. Political and economic circumstances are likely to impact the company's business over the coming financial year and profitability from direct operations is unlikely to show any major improvement. Also the current situation could give the company serious problems in payment of its increased financial expenses for the coming years, in case of increase in interest rates in the future.
However, the company has met the challenges of a highly competitive market in the past and expects to maintain profitability by developing and implementing strategies to meet the needs of a changing market place. Future growth is expected through expansion in branch network and seeking new areas of investment. Hence one can maintain an overall positive outlook for the company.
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ORIX LEASING FINANCIALS
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Balance Sheet 2004 2005 2006 2007 2008
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Gross lease receivables 13,288 17,326 22,951 26,759 26,815
Shareholders' equity 1,846 2,000 2,325 2,379 2,604
Fixed assets 659 684 767 751 832
Long term debts 4,539 5,210 7,500 9,348 14,676
Total Borrowing 7,757 11,114 15,649 16,780 17,361
Long term investments 504 1,004 1,090 1,107 1,401
Total assets 13,236 17,599 23,745 26,155 27,815
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Operating Results 2004 2005 2006 2007 2008
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Total Disbursement 6,544 10,105 11,932 12,142 10,789
Revenues 1,556 1,558 2,311 2,933 3,450
Lease revenue 1,476 1,481 2,102 2,726 2,955
Profit before tax 306 360 455 396 352
Profit after tax 266 321 396 334 267
EBIT 1,558 1,722 2,311 2,933 3,276
Financial charges 519 583 1,285 1,806 2,133
Allowance for lease/
instalment loan 63 80 52 58 105
Proposed Dividend 181 181 243 243 208
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FINANCIAL RATIOS 2004 2005 2006 2007 2008
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PROFITABILITY RATIOS
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Profit Margin 17.10% 20.60% 17.14% 11.39% 7.74%
Gross Profit Margin 19.67% 23.11% 19.69% 13.50% 10.20%
Return on Assets 2.01% 1.82% 1.67% 1.28% 0.96%
Return on Equity 14.41% 16.05% 17.03% 14.04% 10.25%
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LIQUIDITY RATIOS
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Current Ratio 1.30 1.00 1.00 1.10 2.40
Income/Expense Ratio 1.30 1.30 1.20 1.10 1.10
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.59 0.63 0.66 0.64 0.62
Debt to Equity Ratio 4.20 5.56 6.73 7.05 6.67
Long Term Debt to Equity 2.459 2.605 3.226 3.929 5.64
Times Interest Earned 3.00 2.95 1.80 1.62 1.54
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MARKET RATIOS
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Earning per share 4.40 4.60 5.70 4.80 3.80
Price/Earnings Ratio 8.20 6.40 4.50 6.20 6.60
Dividend per share 3.00 3.00 3.50 3.50 3.00
Book value per share 30.60 33.10 33.50 34.20 37.50
No of Shares issued
(in thousands) 184,600 200,000 232,500 237,900 260,400
Market prices(Average) 36.30 29.70 25.70 29.80 25.00
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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