Sustainable Growth Patterns?

Exceptionally high growth in lease disbursements

Sep 28 - Oct 04, 1996

The on-going reporting season for the leasing sector saw yet another fairly strong result near the end of last week. Standard Chartered Mercantile Leasing Company (SCML), one of the stronger players in the industry announced their results for the year ended June 30 1996.

In addition to their customary announcement of a bonus issue, which was 11.11% this year, SCML also announced a 15% cash dividend for the first time in their five years of operation. At the current market price of their shares, Rs 19.10,, this works out to a yield of 7.85%. Although this is not all that high when compared with dividend yields from Paramount and Orix and First Leasing, SCML is, nevertheless, trading at a premium to its net book value of Rs 14.54; not generally characteristic of the industry. And many market players retain profits and reinvest them into the business since resource mobilisation is the industry's largest problem.


The Rs 180 million company posted a 13% increase in revenues from Rs 286 million to just over Rs 323 million end June 1996. Pre-tax profits rose 23% from almost Rs 69 million to more than Rs 84 million, while as a result of a 50% lower tax provisions, after-tax profits registered a shooting 72% growth.

The results, which seem fairly good at first sight, were described by Abbas Anjarwalla, financial sector analyst at AKD Securities as "in line with expectations". "At an earnings per share of Rs 3.91, and a price / earnings multiple of 5, I am neutral on the company which I think is fairly valued in a sector which is still very bearish" Mr. Anjarwalla said.

Salman Rasheed, Head of Research at Fortune Securities was more optimistic," in the face of a stagnating macroeconomic situation, and liquidity crunch, Standard Chartered has paid out a fair dividend. It is a multi-national, mature player, with lower risk and easy access to credit. It has shown stable results from year to year and investors really need not be concerned."

Both analysts agreed, however, that the company would have to maintain its strong growth in net investment in leases in order to keep the tax burden low and achieve the same overall rate of growth. Although the company has not yet declared this amount, market sources said that disbursements during the year had grown to Rs 840 million from Rs 540 million last year; a growth of more than 55%. This included two particularly large losses which were written at the end of the year. Given the current market size of about Rs 7 billion, it is likely to be difficult to sustain this level of growth. Moreover, company sources said that this year's growth was a one-time strategic move, and from next year onwards, they would resume their steady growth path. This might result in some difficulties for the company in terms of a heavier tax burden. Market participants believe that if a company can maintain a 30% growth in leases written, then depreciation (which is a tax deductible expense) and it is the difference between rentals and depreciation which is taxed) will cover the leases, and taxes will be low.

While growth in pre-tax profits was not all that substantial, it would have been significantly higher were it not for a 106% increase in the provision for potential lease losses, which were set at just less than Rs 4 million, up from Rs 2 million last year. The reason for this increase however, was not a change of policy; the standard 1% of net investment in leases was used and since leases written rose, this figure was also higher.

Standard Chartered has not so far encountered any default although it is believed that some rental payments have been delayed in recent times.

SCML deals primarily in middle ticket corporate leases, ranging from Rs 10 million to Rs 25 million in size and have a 20-25% internally imposed limit on sector wide exposure. Currently their largest exposure is 20% to the textile industry including captive power units, and is estimated that other major sectors are energy (17%), cement (11%), sugar (10%), Automobiles (9%) and chemicals and pharmaceuticals (9%).

With the rate of growth in the leasing industry slowing, and reducing spreads as well, it is generally only larger companies which are likely to continue growing well. Many analysts and market participants alike have forecast at least some mergers and acquisitions within the coming months for the smaller companies.

Standard Chartered, with a strong name recognition and solid performance has many factors in their favour. Not only do they have a strong asset base, an established clientele and talented management, but they have managed to counter one of the industry's most serious problems. Most companies efforts have been towards accessing long term foreign currency credit lines for resource purposes. Standard Chartered's highly successful and superbly marketed certificates of investment launched in 1994 have raised a total of some Rs 1 billion. Characterized by exceptional service including profit payments being home delivered to customers, and targeted at the individual, SCML's COIs are not only market leaders but have been developed to the extent that management is not all that concerned about accessing long term foreign currency credit. SCML currently only has access to local credit lines from domestic banks.

With the leasing industry having reached a stage of maturity according to some practitioners, the only way to survive profitably in the foreseeable future where economic activity and industrial expansion is likely to be slow, is through bringing innovative products into the market. And historical trends suggest that Standard Chartered will be a leader in innovating both new deposit products, and leasing packages.