Corporate earnings in the first quarter of financial year 2018 (July-Sept), have drawn strong criticism from some analysts who blamed poor results for hastening the equity market meltdown.

But apart from some poor financial figures that were released at around the fag end of the season, it would be unfair to say that the companies’ earning streams have altogether dried up. Several listed firms distributed higher-than-expected interim dividends. And so long as corporates keep making profits, investors can bank upon the boards to pass on the benefits.

Yet, in a case where the company skipped dividends, an investment guru who is a value-investor in the stock market, explained that in the matter of disbursements, directors generally look at cash flows, not earnings.

Apart from some poor financial figures that were released at around the fag end of the season, it would be unfair to say that the companies’ earnings streams have altogether dried up

There are no ready figures of the number of companies that declared profits and interim dividends and those that closed their bottom lines in the red during the first-quarter 2018.

Yet, based on the analysis of 93 companies out of the 100 firms that constitute the KSE-100 index, the collective earnings of the corporate sector — save for the seven remaining companies of the KSE-100 index that were yet to declare their results — showed a growth of 7.2pc in the 1QFY18 against the corresponding quarter of the previous year.

“It is quite representative of the entire market for it covers 96 per cent of the market capitalisation of KSE-100 index companies”, says an analyst at brokerage Arif Habib Limited.

The stock market meltdown which started from the end of May this year, continued throughout the quarter (July-Sept 2008). During the three months period, KSE-100 index plunged by 4,156 points, more than three-quarters of which was contributed by just two sectors: banks and the cement.

The decline in the banking sector was mostly on the back of the penalty imposed on HBL along with the fizzling hype regarding inclusion in MSCI Emerging Market (EM) Index. The cement sector dropped on the back of lower cement retention prices in the north along with non-materialisation of inflows linked to regrouping of PSX to MSCI Emerging Market, from Frontier Market.

The settlement amount paid by HBL during the quarter was a significant event which corroded the collective profitability of the corporate sector. But being a one-time event and not at all related to company performances, the overall corporate earnings have been calculated after adjusting the HBL settlement amount.

Profitability of the banking sector was down 58pc YoY in Q1. More contributors to the downturn emanated from rising interest expense, primarily on the back of high volumetric growth in deposits, and lower capital gains, due mainly to slump in stock prices.

NBP posted an impressive 75pc YoY improvement in profitability on the back of a staggering reversal booked during the quarter, higher capital gains and dividend income.

The other heavy-weight oil and gas exploration sector recorded a surge in earnings by 41pc YoY, the benefit derived mainly from increase in oil prices by 16pc and increased hydrocarbon (oil and gas) production.

Oil and gas Company Limited, Pakistan Petroleum, Pakistan Oilfields and Mari contributed 23pc, 67pc, 2pc and 8pc towards profit upsurge.

Earnings of the fertiliser sector eroded by 12pc to Rs11.265bn during 3QCY17, while the overall sector sales increased by 20pc during 3QCY17 YoY, which owed itself to higher urea and DAP off take.

Cement sector profitability dropped by 0.7pc YoY in 1QFY18. D.G. Khan Cement and Cherat Cement managed to swim against the tide and increase their profits by 49pc and 50pc, respectively.

The power generation and distribution sector posted collective earnings of Rs6.969bn for 1QFY18, representing growth of three per cent over the same quarter a year ago. Net sales of the sector surged by 17.9pc YoY on account of 21pc higher prices of Furnace Oil along with 1.6pc YoY higher generation to 4,972 GWh.

“The profitability of Oil and Gas Marketing Companies (OMCs) grew by 5.8pc YoY”, stated Arif Habib Research, adding that the earnings growth was led by Pakistan State Oil — the principal player in the sector which exhibited earnings upsurge by 15pc YoY, mainly on account of volumetric growth during 1QFY18.

Introduction of new models in the automobile sector, which in turn resulted in a 27pc growth in sales, swelled sector profits by 38pc YoY. Pak Suzuki Motor Company, Honda Cars and Indus Motors produced positive earnings growth with Pak Suzuki leading the pack due to tremendous growth in sales numbers.

In the tractor market, Millat Tractors posted impressive sales; given agriculture growth in the country and CPEC related transportation activities.

The textile sector was the laggard during the quarter with overall profitability eroding by 51pc YoY due to a global slump in demand of textile products. “Increase in cotton prices along with expensive cotton inventory from last year dented sector profitability”, analysts said.

Profitability of the engineering sector showed stellar growth of 35pc YoY, led by volumetric as well as value growth given that the steel companies continue to remain shielded by protectionist duties at import level.

According to AHL Research, the Pharmaceutical sector displayed a subtle 2.98pc YoY growth in profitability during 3QCY17. GlaxoSmithKline, the sector giant, was the major contributor to profitability, which rose by 11pc YoY.

Published in Dawn, The Business and Finance Weekly, November 13th, 2017