Economic Undertakings

Orix Leasing Pakistan Limited – BR Research

Orix Leasing Pakistan Limited (PSX: OLPL) was established in 1986 as a result of a joint venture between ORIX Corporation, Japan and local investors. Initially it was a private entity but in 1987 it was transformed into a public limited company. The company offers investment finance services as a non-bank finance company (NBFC). Some of its products include commercial vehicle leasing, corporate leasing, automobile leasing, leasing, microcredit, Islamic finance, and e-commerce.

Shareholding model

As of June 30, 2021, nearly 50% of the shares were held by associated companies, companies and related parties. This category only includes ORIX Corporation. The local general public owns about 21 percent of the shares, followed by over 11 percent in the “other” category. The directors, the CEO, their spouses and their minor children collectively hold less than 1% of the shares; more than 7 percent are owned by foreign companies, followed by almost 6 percent by insurance companies. The remaining 4% of shares belong to the rest of the shareholder categories.

Historical operational performance

Excluding FY16, operating income has mainly increased over the years. Of this amount, finance leases have systematically contributed to operating income, but the contribution from operating leases has gradually decreased. The net margin has fluctuated over the past six years, peaking in FY18, declining over the next two years, and improving again in FY21.

After witnessing a marginal contraction in FY16, operating income increased by 2% in FY17. While the majority of the income, 70.4% to be precise, was provided by leasing, the increase in the contribution itself year over year has been marginal; 69% of operating income was generated by leasing during FY16. During the year, demand for commercial vehicles and sedans was encouraged thanks to an overall positive economic environment, particularly in the SME and consumer sectors. This also led to an increase in the company’s cash disbursements which was recorded at Rs 15 billion in terms of value. Operating leases, which were declining, recovered somewhat at the end of the year as power shortages gave way to demand for rental generators. With some reduction in finance costs, the net margin increased to 24.5% for the year.

During FY18, the growth in operating income was marginal at 1.3%. A significant share of income was again generated through leasing, accounting for nearly 73 percent of total income, with leasing disbursements increasing by 14 percent. On the other hand, the share of operating leases decreased, notably from 13.8% in fiscal year 17 to 9% in fiscal year 18, while total disbursements rose to 17.2 billion rupees; vehicle financing increased 19 percent due to a boom in the automotive sector; utility vehicle makes 34 percent of the total volumes. The rationale for the decline in the operating lease is that it saw the divestment of its underperforming assets. It sold its diesel and gas generators while some were leased under Ijarah financing. With a decline in total borrowing, coupled with the divestiture of generators and an increase in other income, the net margin was exaggerated to a record high of nearly 40 percent.

During FY19, operating income grew by almost 11%, the highest ever, following the same trend of finance leasing making the biggest contribution, while leasing Operations continued to decline as a percentage of operating income. But total disbursements for the year fell 19% as the company focused on risk management and diversification rather than asset growth. Disbursements to corporate clients have been reduced by 18%. In addition, the company also reduced its exposure to the commercial vehicle sector in the event of a downturn in the segment. This translates into a 33% drop in volumes in the transport sector. As other income also returned to pre-fiscal 2018 levels, the net margin was reduced to 26.5%.

The Covid-19 epidemic had a negative impact on the activities of Orrix Leasing, as evidenced by the drop in disbursements from Rs 22.7 billion the previous year to Rs 19 billion in fiscal year 20 ; the company took little new business. The operating result in value increased by almost 5% supported by the increase in leases and margins on term finance / factoring. Rising interest rates for much of the year pushed up financial expenses, which accounted for almost 45% of income. This brought the net margin down to over 17 percent for the year.

In fiscal year 21, operating revenues decreased by 19%. This is due to the drop in interest rates compared to the previous year, as evidenced by the decline in finance lease income. As a result of Covid-19, the company’s leasing and loan portfolio had fallen to nearly Rs 19 billion in FY20. In FY21, it grew to 21 , 6 billion rupees due to higher business volumes. With an even greater reduction in financial expenses as the company experienced lower interest rates throughout the year, the net margin increased to 27.9% for the year.

Quarterly results and future outlook

Operating revenue grew 2% in 1TFY22 year-on-year, with the majority of the growth coming from term finance / factoring markup, while finance lease revenue growth was minimal due to lower interest rates. On the other hand, total expenses were significantly higher as a proportion of income mainly due to higher administrative and general expenses. The increase was attributed to the increase in staff salaries etc. while the administrative expenditure figure for last year included “a reversal for a provision for the collection of leave. Thus, the net margin was reduced to 25.6%. Although the economy is expected to grow, rising inflation and interest rates could slow economic activity.

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