KARACHI, May 30: It is difficult for the best of stock picking gurus to understand the market mood. In deciding on whether to invest or not to invest in the modaraba sector, investors ought to have sifted the good from the bad and the remunerative sound-growth scrips from hapless lame ducks. But for at least the last six years, investors seem to be treating all of them alike.

Only three of the 35 publicly quoted modarabas are currently trading at prices higher than their par value—First Grindlays; First Imrooz and Fayzan Manufacturing Modaraba— yet as many as 19 declared cash dividends for the year 2001, to their certificate holders, in the range of 1.5 to 46 per cent.

The top five dividend payers for 2001 were: First Imrooz at 46 per cent, First Grindlays at 33 per cent, First Habib at 22.50 per cent, First Equity at 15 per cent and First Habib Bank at 14.50 per cent.

Part of the reason that Imrooz is able to pay the highest dividend in the modaraba sector and the price of its stock rallies to the top at Rs28.40, is also its low equity base. At only Rs30 million, the paid-up capital of First Imrooz Modaraba is about the lowest in the sector, matched only by the First Custodian Modaraba—though that stock is a lame duck.

First Imrooz Modaraba made the entry into the capital market on February 1, 1994. It began commercial operations after the receipt of minimum subscription certificate from the Registrar Modaraba, on March 1, 1994.

First Imrooz is a multi-purpose modaraba and derives bulk of income from trade. The latest financial results released by the Modaraba for the third quarter Jan-March 2002 and nine months to end-March 2002 show substantial decline in sales, though the bottomline remained just about flat.

Sales for the nine months to end-March 2002 amounted to Rs204.1 million, reflecting a drop of around Rs100 million, from Rs305.4 million in the three-quarters of last year. Directors attributed it to the decrease in overall volume of trade, following the 9/11 events. Due to reduction in cost of sales, gross profit margin improved to 16.1 per cent, from 12.5 per cent. “Other income” contribution increased to Rs3.4 million, from Rs0.5 million and rescued the results. Directors said that the improvement was mainly due to dividend income and exchange gain, due to the strengthening of Pakistani rupee.

Profit for the nine months under review stood at Rs28.2 million, which was 4.7 per cent lower than profit of Rs29.6 million in the same time last year. Modaraba company—A.R. Management Services (Private) Limited — charged Rs1.5 million as management fee, reflecting 5 per cent of the profit for the period. Pretax profit for the nine months was down 4.6 per cent to Rs26.8 million, from Rs 28.1 million. Due to the lower incidence of taxation at 56 per cent, against 62 per cent, after tax profit showed an increase of 12.3 per cent to Rs11.9 million, from Rs10.6 million.

First Imrooz Modaraba held Rs132.4 million in total assets. The shareholders’ equity amounted to Rs66.3 million and the break-up value per certificate worked out at Rs22.10.

Current assets of the Modaraba totalled Rs128 million with Rs80.6 million in stock in trade. Cash and bank balances amounted to Rs15 million.

Directors do not state in their report if raising funds was a problem for the Modaraba. But for most modarabas, it is a major concern. Already in gruelling competition for funds with commercial & investment banks and leasing companies, the Modaraba sector, by virtue of their code must also tap only the avenues that fall within the realm of Islamic mode of financing.

Analysts say that if Modaraba companies could become more competitive in their cost of funding and not rely on banks then they could substantially reduce ‘cost disadvantage’. Since tax rates on banks have been gradually reduced and non-performing loans are being dealt with, the banks outclass modaraba companies in cost of funding and cause atrocious competition.

“Furthermore, if modaraba companies could lower their cost of funds, they would not only improve their gross and operating margins but also would be in a better position to diversify their market and innovate products,” says an analyst at KASB & Co.