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THE KASB REVIEW

  1. The KASB review
  2. Finex week

An exclusive weekly Stock Market report for PAGE by Khadim Ali Shah Bukhari & Co.

Updated on Apr 03, 2000

The market remained susceptible to volatility touching a low of 1930-1933 levels, but bounced back immediately, and eventually closed at 1999.69 on the last trading day, registering a decline of 0. 11% w-o-w.

Positive government announcements as to forbidding corporates from investing in the National Savings Schemes (NSS), whereas giving the go-ahead to repatriation of remittances pushed the foreign investors back into the market ring after a long period of absence.

General Pervez Musharraf's softened attitude on the Kashmir issue also played a significant role in diluting the fear of any near term conflict with India.

Domestic institutions maintained caution and refrained from injecting any funds, demonstrating low expectations of any upside, while the retail side was relatively more active.

Expectations of a positive outcome from the forthcoming visit by the IMF teaM were noticeably high. A prominent rumoUr concerning an upward revision in PSO margins swamped the market, causing a lot of stir, but failed to establish itself twice.

The market continues to remain range bound with the KSE 100 gyrating between 1900-2000.

National Development Leasing Corporation

• NDLC was the first leasing company in Pakistan, and still enjoys a dominant market position.

• Big ticket leasing has been NDLCs forte, but the adverse economic conditions and the greater competition seen in the industry has led it towards leasing to the end-user in small ticket items like cars

• NDLC will be able to expand its customer base at the retail level, in our opinion lowering its overall credit risk profile as it moves from the lemons (bad credit risks are generally to pay higher rates than good customers) to the plums

• NDLC enjoys an 'A-1' and 'A' rating from PACRA for the short and long term respectively

The Company

National Development Leasing Corporation Limited was the first leasing company to be established in Pakistan, through a joint venture between the National Development Finance Corporation (NDFC), the Asian Development Bank (ADB), International Finance Corporation (IFC), and a local private group (Habib Group). All the latter three have since divested their holdings.

Over the last four years NDLC has been going through a tough patch, but has managed to maintain profitability. Profitability has been affected by two factors:

Historically, big ticket leasing has been NDLCs forte, but the adverse economic conditions and the greater competition seen in the industry has led it towards leasing to the end-user in small ticket items like cars. The move to higher credit risk customers and stricter SBP prudential regulations have required greater provisioning to be taken on, especially in 1998 when provisioning amounted to Rs 100 mn plus.

• Its exposure to the textile sector, which evidenced a downturn in the last four years, also affected profitability.

• Over the same period the new management of NDLC had also implemented measures to improve the balance sheet even at the cost of profitability. This period saw NDLC retire a major component of its foreign debt component, it has also seen a fall in short

• Term funds raised through COIs, replaced by longer term funding like the Rs300 mn TFC issue.

Lower interest rates will benefit NDLC

The current interest rate scenario with interest rates having fallen close to 400bps in the last 3 months augurs well for NDLC.

• The lower interest rates will allow it to lower its cost of funding especially from COls

• NDLC will be able to expand its customer base at the retail level, in our opinion lowering its overall credit risk profile as it moves from the lemons (bad credit risks are generally to pay higher rates than good customers) to the plums.

• The lower interest rates have also benefited the now recovering textile sector, where NDLC had significant credit exposure.

Debt servicing capacity

NDLC enjoys an 'A-1' and 'A' rating from PACRA for the short and long term respectively.

NDLC's new managements efforts to has eliminated the debt miss-match which has been evident in the 1994-97 period, through a substantial increase in its long term funding base, i.e. through a Rs300 mn TFC, and a reduction in the much more volatile COIs.

The Rs300 mn TFC is secured by a charge on specific leases, which provides a 30% security margin.

The transfer from foreign debt to domestic debt has also allowed NDLC to cut down on the cost of foreign exchange cover, and also tap the lower interest rates available in the domestic debt markets.

With economic recovery seen as imminent and the monetary environment set to remain liquid, NDLC's earnings should improve from the second half of FY00.

Plus with Debt-Servicing to Net Free Cash Flows down to 2.92x from 17.62x, its ability to service future debt is much improved. Moreover NDLC's large equity base provides more than adequate cover for any potential loan losses.