Illustration By Abro
WITH the spring results reporting season now all but over, corporate profitability has turned out to be generally disappointing for the first quarter of the year, January-March 2013.
Markets were in for a surprise, as companies’ earnings have held up fairly well in recent times, and analysts had been visualising all but growth in the outgoing quarter as well.
Headline profit growth for the first quarter 2013 (1Q2013) of the 100 companies that encompass the KSE stock index came out at a lacklustre two per cent. It fell far short of the splendid earnings growth of 15 per cent recorded in the fourth quarter of 2012.
However, the weak earnings trend was largely concentrated in banks, oil and gas, and exploration and production (E&P) companies. Excluding these sectors, earnings growth shot up 44 per cent over 1Q2012.
Directors pondering over the results in boardrooms are generally loath to distribute dividends to shareholders in the first quarter of the year, which is why, except for a few companies, the quarter was blank in terms of shareholder payouts. Most companies prefer sitting on large piles of cash.
Altogether, 1Q2013 was frustrating for stockholders, particularly at a time when the booming stock market pushed the benchmark KSE-100 index past an incredible 19,000-point level — a record high that the best of investment gurus could scarcely have predicted two years ago.
An analysis of the January-March quarter results by Foundation Securities brokerage reveals that almost half of the two dozen major companies listed in 10 active sectors unveiled financial figures that turned out to be ‘lower than expectations’. And the heavily weighted oil and gas sector could not have done any worse, as all three of its major companies, Oil and Gas Development Company (OGDC), Pakistan Oilfields Limited (POL), and Pakistan Petroleum Limited (PPL), came up with what analysts called ‘negative surprises’.
The company with the heaviest weightage in the KSE-100 index, OGDC, reported earnings per share (eps) of Rs7.50, representing a stunted growth of 17 per cent over the previous similar quarter (YoY). POL recorded a below-than-expected 17 per cent increase in eps at Rs12.52 YoY, while PPL’s earnings per share dropped eight per cent to Rs6.84.
Mohammad Fawad Khan, an analyst at Foundation Securities, observed: “Among big negative surprises were exploration and production, autos, and the chemical and telecom sectors”. Fertiliser and cement results broadly met consensus estimates, while banks and Independent Power Producers (IPPs) exceeded expectations. Among banks, UBL, MCB and Allied posted earnings that were higher than expectations, while HBL’s earnings came in line with the forecasts.
However, a senior banker said he would take those earnings growth with a pinch of salt. “The bottom lines of most banks are glowing due to write-back of provisioning, which is more of fudging of figures, and scarcely a measure of bank performance.” While summing up 1Q2013 results, JS Research analyst Farrah Marwat said fertiliser companies had been a turnaround story, as the sector showed a smashing return to form with a profit growth of 171 per cent YoY, led by a sharp recovery in sales.
Textiles, cement and IPPs were once again strong performers, while oil marketing companies stayed unremarkable. Banks were expectedly weak, while E&P’s underperformance was somewhat of a ‘negative surprise’.
Aggregate profit after tax (PAT) posted by the fertiliser sector for 1Q2013 amounted to Rs8.87 billion, up 171 per cent over PAT of Rs3.28 billion YoY. Textile earnings grew by 127 per cent to Rs1.99 billion for the latest quarter, from Rs875 million YoY. Meanwhile, the cement sector was the third best performer, with 1Q2013 earnings up by 74 per cent to Rs3.99 billion from Rs2.87 billion in the same quarter the previous year.
The rejuvenation in earnings of textile and cement sectors seemed to prove those critics wrong who had suspected that the sudden jump in stock prices of second and third tier cement and particularly textile companies, which had been listless for over two decades, was going to trap unsuspecting small shareholders. Right from the 12,000-point level, the KSE-100 index has been carried all the way past 19,000 points by a manifold rise in share values of hugely discounted textile and cement scrips, which many frustrated shareholders had long ago dumped as worthless.
Going forward, Marwat forecasts strong earnings growth in fertiliser, cement, textiles and IPPs, with E&P profits also expected to tick-up in the second half of 2013. The potential game changers are believed to be policy and regulatory changes that may come about through several developments, including the budget for FY2014, as well as a potential return to the IMF. Policies of the new government post peaceful elections, and playing out of Competition Commission of Pakistan cases against the fertiliser and the telecom companies are also potential game changers.
Meanwhile, senior financial analyst Atif Malik suspects that the corporate sector may not be able to see a double-digit growth for the full year 2013. While textiles, cement, fertiliser and fast moving consumer goods companies can come up with pleasant numbers, overall corporate profits may be dragged down by the banking and E&P sectors, he said. Lower interest rates would make it difficult for banks to post hefty profits sans write-back in provisioning, while E&P may witness stagnant earnings growth due to dearth of major new discoveries.
Foundation Securities analyst Mohammad Fawad concurred. “Driven by heavyweight sectors like banks and E&Ps, we eye risk of earnings downgrade and hence lower (full year) corporate growth.”
A fund manager, while conceding that a downgrade in full year earnings was bad news, went on to suggest that the smooth transition of power to a business-friendly government, and a possible entry into the IMF programme, could provide big boost to investor sentiments at the country’s equity markets.