Orix Modaraba

Orix Modaraba (PSX: ORIXM) was set up in 1987 under the Modaraba Companies and Modaraba Ordinance, 1980. The modaraba is managed by ORIX Services Pakistan (Private) Limited. It is engaged in financing of plant and machinery, motor vehicles, computer equipment and housing.

Shareholding pattern

As at June 30, 2020, nearly 52 percent certificates are held under the category of “individuals”, followed by 18 percent in financial institutions. The latter includes ORIX Services Pakistan (Private) Limited, holding 10 percent of the certificates. Insurance companies hold close to 13 percent certificates, while modarabas/ modaraba management companies hold about 10 percent certificates. The latter includes ORIX Leasing Pakistan Limited that holds 10 percent. The remaining about 8 percent certificates is with the rest of the shareholders.

Historical operational performance

The company has mostly seen a growing income over the years, with the initial years seeing double-digit growth that slowed down later. revenue has contracted twice, in FY15 and FY16 by 10 percent, and then again more recently in FY20 by less than 1 percent. On the other hand, net margin has followed a gradual declining trend, from 9.4 percent in FY10 to 6.3 percent in FY20.

After contracting for two consecutive years, total income increased in FY17 by a marginal 2.3 percent. The portfolio of Ijarah finance, Sukuk investment and Diminishing Musharika finances increased by 12.6 percent, from Rs 4,838 million to Rs 5,449 million. On the other hand, administrative expenses increased to make up nearly 7 percent of revenue; most of this incline was associated with salaries expense. In addition, depreciation on assets under ijarah arrangements also increased to consume nearly 79 percent of revenue. Thus, the slightly higher revenue could not be translated into a higher net margin, that was recorded at 6.8 percent for the year, compared to 9.4 percent in the previous year.

In FY18, the company saw a rise in revenue by a little over 3 percent. While income on deposits with banks remained the same, ijarah rentals and income on diminishing Musharika transactions grew by 1.3 percent and almost 39 percent, respectively. The portfolio of Ijarah finance, Sukuk investments and Diminishing Musharika finances grew to Rs 6,327 million during the year, compared to Rs 5,449 million in FY17. Although total income along with other income was higher year on year in value terms, it was not sufficient to offset the rise in expenses. Depreciation on assets under ijarah arrangements went down only slightly as a share in revenue, while finance expense and administrative expenses continued to increase. Therefore, net margin contracted to 6 percent.

In FY19, the company saw its revenue growing close to 4 percent, crossing Rs 2 billion. While income from ijarah rentals registered a 7.5 percent decline, income on diminishing Musharika transactions increased by 2.5 times to Rs 339 million. However, there was a marginal decline in portfolio of Ijarah finance, Sukuk investment and Diminishing Musharika finances by 1.62 percent, reaching Rs 6,225 million. On the other hand, administrative expenses grew to consume 7.5 percent of revenue, while depreciation on assets under ijarah arrangements dropped to 67 percent of revenue. This helped to improve net margin slightly to 6.2 percent, despite the rise in finance expense coming from higher discount rates.

Revenue in FY20 declined very marginally by less than 1 percent. Most of this decline was seen in ijarah rentals earned, while income from diminishing Musharika transactions and deposits with banks picked up. Depreciation on assets under ijarah arrangement continuously declined due to “decrease in ijarah assets and related ijarah rentals. Finance expense, on the other hand, continued to rise as the decline in discount rates due to the outbreak of Covid-19 did not occur until the end of the last quarter of FY20. Portfolio of ijarah finance, sukuk investments and diminishing Musharika finances also declined for the second time to reach Rs 5,863 million, down from Rs 6,225 million in FY19. Despite this, net margin increased slightly to 6.3 percent, as the decline in depreciation of assets under ijarah arrangements was significant.

Quarterly results and future outlook

Income in the first quarter of FY21 was lower by 13 percent year on year as in line with the effect the Covid-19 pandemic has had on economic activity. However, profit margin was better compared to the same period last year due to fall in finance expense due to reduced average KIBOR. The effect of lower discount rates was more prominent in quarterly results of FY21.

The second quarter of FY21 also saw lower revenue year on year, by almost 21 percent. All three sources of income- ijarah rentals, income on diminishing Musharika arrangements and income on deposits with banks, witnessed a decline. Yet, net margin was better than same period last year due to a notable decline in finance expense. Similar pattern followed in the third quarter as well. Overall, the portfolio saw a decrease of 7.27 percent, from Rs 5,863 million as at June 30, 2020, to Rs 5,644 million. Having maintained profitability until the nine months ended of FY21, the year is likely to close better year on year.