THE reporting season is in full bloom with scores of companies daily coming up with their earnings announcements. Most corporates have posed stellar growth in earnings, and it would be unfair to deny their managements of credit, which is due to the gains they made in efficiency.

While the reasons for overall growth in profits vary from sector to sector, one major component in companies’ profit and loss accounts is the huge, all-round reduction in ‘finance costs’.

The central bank had slashed the key interest rate to an 11-year low of 8.5pc in its last monetary policy announcement in January. The inflation figure for February — announced last week at 3.24pc, down from 3.96pc in the earlier month — has paved the way for a further cut in the interest rate by the SBP later this month.

Former KSE chairman Arif Habib agrees that reduced interest rates have lowered companies’ financial costs and enabled them to reduce their leveraging, which shored up their bottom lines.

An economist pointed out that from its peak of 14pc in November 2010, the SBP’s policy rate has recorded a decline of 5.5pc in about four years.

Many corporates with stellar growth in earnings and the eagerness to free their balance sheets of debts are pre-paying their loans, albeit after paying a certain amount of penalty. Banks are, thus, flush with liquidity that has nowhere to go but into Treasury bills and Pakistan Investment Bonds

And the major beneficiaries of this have been the highly leveraged cement, textile and fertiliser companies. The recently released results show that the cement sector posted a growth of 40pc in earnings to Rs12.7bn for the quarter ending December, from Rs9bn the prior quarter. Analysts attributed this to strong local demand and declining financial charges owing to smooth deleveraging.

The CEO of Kohat Cement, Aizaz Mansoor Sheikh, concurs, saying the decline in finance costs has enabled companies to direct their liquidity towards repaying long-term debts, with the benefit getting reflected in their bottom lines. “It has also enabled firms to generate in-house financing for expansion,” he says.

Among cement companies, Kohat Cement is a bright example of a turnaround. The company, with annual capacity of 2.8m tonnes of grey cement and 150,000 tonnes of white cement, saw its long-term liabilities subside to Rs1.72bn at the end of FY2014, from Rs3.41bn in 2010. Its finance costs fell to Rs154m in FY14 from Rs249m in the prior year, as its long-term finances reduced to Rs1.47bn from Rs3.8bn.

As the company jumped out of the red of Rs328m in 2010 to an after-tax profit of Rs3.2bn in 2014 and as the board resumed paying dividends in 2012, Kohat Cement’s stock surged from just under Rs8 a share two years ago to last Thursday’s close of Rs194.

Engro Fertilisers Limited (Efert) is another company that has managed to post a bright bottom line owing to efficiency, supplemented by a decrease in financial costs. Ruhail Mohammed, its CEO, told Dawn that the company’s debts peaked at Rs70bn in 2012. These had been brought down to Rs44bn by end-December 2014.

For calendar year 2014, the company’s finance costs dropped to Rs6.6bn from Rs9.9bn in CY13. Its debt-to-equity ratio had improved to 70pc in 2013 from 84pc in 2010. Efert’s parent, Engro Corporation, has also bolstered earnings by deleveraging its balance sheet, as its consolidated debt amounted to Rs73bn by 2014, down from Rs99bn a year ago.

The textile sector, saddled with debts and deficit for years, is also generally freeing itself of debt/servicing charges.

A director on the board of Orient Textile Mills, Rafiq Ibrahim, admitted that the reduction in finance costs has helped the textile sector to boost its earnings, but lamented that the industry is operating under tough odds.

“The corporate cash is stuck up in sales tax refunds and duty drawbacks on which textile companies have to pay interest.” He added that this is a drain on their liquidity and nullifies the positive impact of lower finance costs on other debts. He also complained that the industry is unable to compete with India and China, which provide huge subsidies to their textile sectors.

While lamenting that a gain for industries is a loss for depositors, Ali Raza, ex-president of the NBP, said corporates have benefitted by low interest rates for working capital and project financing.

“Given the prospect of a further cut in profit on deposits from 6pc, bank depositors are likely to shift their money to mutual funds, whose returns are generally 2-2.5pc higher, and to National Savings Schemes, where the money would fetch 1-1.5pc more,” he said.

Banking analysts said that on the brighter side, banks have benefitted from prompt payment of stuck up loan instalments, which has restored to health a considerable portion of their infected loan portfolios.

Yet, on the flip side, the private sector is avoiding investment in new industrial ventures and even putting their balancing, modernisation and replacement (BMR) plans for existing projects on hold due to perennial problems of shortage of gas, water and electricity.

Many firms with stellar growth in earnings and the eagerness to free their balance sheets of debts are pre-paying their loans, albeit after paying a certain amount of penalty. Banks are, thus, flush with liquidity that has nowhere to go but into Treasury bills and Pakistan Investment Bonds.

Published in Dawn, Economic & Business, March 9th, 2015

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