CORPORATE profitability was on the rise these past nine-months (Jan-Sept 2018) as revealed by the just concluded autumn financial results reporting season.

The profit after tax (PAT) clocked in by 96 of the 100 companies that comprise the KSE-100 Index amounted to Rs480.4 billion showing collective growth of around 7.8 per cent over net profit of Rs445.5bn earned in the corresponding period of the previous year.

Fertiliser companies were ahead of the rest with earnings showing an impressive surge of 90pc to Rs54bn over PAT amounting to Rs28bn earned in 9MCY17. Other profitable sectors were way behind. Oil and gas exploration companies could shore up earnings by 27pc to Rs130.8bn from Rs103.1bn followed by chemical sector earnings up 19pc and Power Generation and Distribution bottom line boosted by 14pc.

On the flip side, major erosion in overall earnings for the nine-month period was witnessed in the banking sector with earnings down 10pc to Rs113.8bn, from Rs126.8bn year-on-year. The poorer earnings of the banking sector spoilt the profitability of the entire corporate sector since commercial banks now command the highest weight of 24.6pc in the KSE-100 Index.

As long as corporates keep making profits, investors can bank upon the boards to pass on benefits to restore investors’ confidence in the equity market

The decline in earnings of the banking sector was attributable to Habib Bank Limited’s New York settlement payments and adjusted pension costs of large banks. The decrease also represented hefty provisioning expenses booked by certain banks and lower capital gains.

Auto assemblers also posted dismal net earnings for 9MCY18 that declined by nine per cent to Rs23.6bn from Rs26.6bn. A sector analyst said: “Amid an unfavourable environment for autos including weaker rupee, rising inflation and interest rates, the influx of new competition could make the situation more challenging for the existing Original Equipment Manufacturers going forward”.

For the 9MCY18, Oil and Gas Marketing Companies aggregate earnings also dropped nine per cent to Rs19.0bn, from Rs20.9bn. After tax profit of the cement sector stood shaded by eight per cent to Rs33.0bn, from Rs35.7bn year-on-year.

Analysts at brokerage Arif Habib Limited worked out the performance of low weighted sector separately where the collective profit earned by the textile spinning sector increased by a whopping 169pc; followed by leasing sector earnings which jumped up by 89pc; Insurance profits higher by 35pc; Paper and board profit increase by 27pc and that of Food sector reflecting a 16pc glossier bottom line for the latest nine months against the same period in 2017.

Analysts worked feverishly on their calculators to work out the best and the worst performing sectors during the third-quarter (July-Sept) for most fund managers tend to allocate fresh funds on the merits of the latest quarter.

Profitability of the corporate sector for the 3QCY18 increased marginally by 0.8pc over the same time last year, the tiny growth driven by a profit upsurge of 39pc in the oil exploration and production (E&P) sector and by 53pc in the fertiliser sector.

Of particular interest going forward would be the textile sector as the country needs to accelerate exports to alleviate the growing trade deficit. To facilitate the sector, the government has allowed subsidised gas rate for five zero-rated export oriented sectors with effect from Sept 27.

With regard to the cement sector, Elixir Securities noted that dispatches could remain modest going forward owing to a slowdown in the economy; cut in the PSDP after entry into the International Monetary Fund programme and drop in construction activities amidst rising interest rates (ie Home financing).

Pressure on cement prices might be seen in the North due to upcoming expansions while sticky coal prices on the higher side also remain a key concern for the sector. Flat domestic offtake growth was anticipated in FY2019. Fast moving consumer goods (FMCGs) companies could benefit by the ability and willingness of consumers to pay more.

Senior analyst at brokerage Topline Securities said that the profitability of the corporate sector grew at a slower pace in 2018, after several years of impressive earnings upsurge. They attributed it to several factors including the depreciation in the value of the rupee; political and economic uncertainty and rising interest rates.

The overall profit growth for the corporate sector in 9MCY18 corresponded with a break in the losing spree at the stock market.

During the nine months under review, KSE-100 Index gained 521 points (1.3pc) with the bull run led by Fertiliser stocks that contributed 926 points to the Index rise followed by banks adding 712 points and E&P clocking in 366 points. The laggards were cement stocks taking away 360 points and automobile assembler shares scrapping 341 points from the Index.

Pragmatists nonetheless, caution that good times may not roll on forever in the face of mounting inflation, escalating price of gas and power and increasing interest rates.

On the flip side, the decline in international oil prices by 25pc since hitting a multi-year high of $86 on Oct 03, bodes well for the economy. More positives for the economy that could translate to corporate earnings growth are shaping up.

Alfalah Securities in a recent report reminded that the $6bn support package from Saudi Arabia takes care of about half of the countries FY19 net financing gap. “Along with the IMF programme to implement reforms (and Chinese financial assistance package), it might control fiscal slippage and kick start economic rejuvenation.”

The next quarter results would show if the companies’ earnings streams are drying up. But as long as corporates keep making profits, investors can bank upon the boards to pass on benefits to shareholders in dividends and restore investors’ confidence in the equity market.

Published in Dawn, The Business and Finance Weekly, November 19th, 2018