ORIX LEASING PAKISTAN LTD
S.M. ABBAS ZAIDI,
Research Analyst, PAGE
Mar 30 - Apr 05, 2009
ORIX Leasing Pakistan Limited (OLP) is a subsidiary of ORIX Corporation, Japan's leading integrated financial services company spread over 26 countries. OLP is listed on Karachi, Lahore and Islamabad Stock Exchanges. OLP has assets of Rs. 27.81 bn and a net worth of Rs. 2.60 bn as on June 30, 2008.
OLP, one of the leading leasing companies in Pakistan, following the footsteps of its Japanese parent, has played a major role in developing leasing industry of 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. Through its strategically located branch offices throughout Pakistan, OLP provides quality services to its broad client base. The company also serves as the regional headquarter for ORIX Group operations in the Middle East.
The company earned a profit of Rs. 45 mn in the first quarter in 2008. However, in the wake of the liquidity crisis which struck the country's financial institutions in October 2008, the company recorded a loss of Rs. 80 mn in the second quarter. Consequently, the company posted a loss of Rs. 34 mn for the half year as compared to a profit of Rs. 166 mn earned in the same period last year.
Lack of funding forced the company to reduce lease disbursements sharply in the second quarter to just Rs. 0.9 bn versus Rs. 2.7 bn in the first quarter. The six monthly disbursements amounted to Rs. 3.6 bn against Rs. 4.9 bn in the first half of last year. Finance lease and installment loan revenues increased by 4% to Rs. 1.27 bn (2007: Rs. 1.22 bn). Operating lease revenues, benefiting from a larger portfolio of operating lease assets and better deployment, were higher by 23% at Rs. 306 mn (2007: Rs. 248 mn). The sharp increase in interest rates resulted in a 20% increase in finance cost to Rs. 1.25 bn against Rs. 1.05 billion in the corresponding period. The increased financial expenses were incurred on lower average borrowings of Rs. 17.4 bn (2007: Rs. 17.7 bn).
Administrative and general expenses were 25% higher at Rs. 304 mn (2007: Rs. 244 mn) as the company had increased staff levels and related infrastructure in anticipation of meeting higher business targets when the new fiscal year started in July 2008. Following the sudden financial crisis of Oct 2008 and the severe restriction on new business, immediate steps were taken to reduce costs, including cuts in salaries.
FINANCIAL PERFORMANCE OF ORIX LEASING LTD INDICATORS 31ST DEC 2008 Total Assets 28,515,108,251 Current Assets 13,154,171,860 Current Liabilities 6,065.679,331 Administration Expense 304,272,769 Loss/ Profit Before Tax (23,892,630) Loss /Profit After Tax (34,424,093) Loss/ Earning Per Share (0.43)
LEASING SECTOR AND ITS CHALLENGES
There are a total of 27 companies in the leasing sector of Pakistan. These include 16 leasing companies, 4 investment banks, 2 investment companies, and 5 modarabas. In 1997, 32 leasing companies were operational in the country. This number has been decreasing since then, especially after 2000 increase in the minimum paid-up capital requirement for leasing companies to Rs 200 million led to mergers and acquisitions.
The recent performance of the leasing sector was affected by strong competition from commercial banks, which are increasingly offering products and services similar to that of NBFC's, including leasing companies.
Pakistan's economy has been going through very testing times. This is true for the financial sector as well of which leasing companies are an integral part. The constantly rising interest rates in the economy and breakneck inflation have proven deterrent to attract potential customers. Even industrial customers would be less willing to lease machinery or equipment from leasing companies as the cost of doing so would be too high keeping in mind how poorly the industrial sector is expected to perform in the future.
Cut-throat competition from commercial banks will continue to haunt ORIX and other leasing companies. Banks are increasingly offering products similar to that of leasing companies and also have greater penetration in the market. Looking at the distribution of assets financed by lease, ORIX Leasing Ltd has been heavily engaged in leasing vehicles, plants, and machineries.
Nearly 70% of the company's leasing activities are in the form of consumer facilities, which will also be negatively affected by high interest rates, inflationary pressures and the resulting lack of purchasing power of the potential customers. Although the leasing sector has historically aimed at to provide its services to the SME sector, there still is unmet demand from the SMEs.
Unfortunately, due to high interest rate and inflation the demand for vehicles is dropping. In addition, the cost of automobiles increased due to rise in steel prices (till a few months back) and yet to phase out this impact following price downward spiral, rising energy costs, and a major depreciation in the rupee value. All these factors in aggregation discourage demand for leasing vehicles. Therefore, it can be expected that leasing companies will be hit hard in the future.
The future of the company will be very testing with political and economic uncertainties creating hurdles in operations and may even hurt the interests of the company. If ORIX can deal with the competition from within the leasing sector and from outside it, harness the opportunities exist alongside downsides, and continue its steady performance, then it will be able to withstand the negative outlooks.