The meeting of a group of industrialists and businessmen with the chief of army staff on Oct 2 to discuss the problems that the community is facing should give an idea about the desperation of the industry captains.
The last fiscal year was all too cruel for industrial and business growth. The galloping increase in gas and electricity tariffs, massive increase in interest rates and astounding devaluation collectively made a sorry mess. Hounded by the taxman, things became worse for businessmen. Most industrial units ended up with the cost of sales staying way ahead of revenues, suffering attrition in gross margins, operating profits and net earnings.
Industrialists’ woes are depicted by the performance of companies listed on the Pakistan Stock Exchange (PSX). Profitability of quoted companies for 2018-19 amounted to Rs588 billion, down 4.7 per cent from a year ago. The calculation is based on 86 of the 100 companies that comprise the KSE-100 Index. The rest of the 14 companies have not released their financial statements yet.
Profitability of listed companies in 2018-19 amounted to Rs588 billion, down 4.7pc from a year ago
These companies represent 92pc of market capitalisation. Net earnings of commercial banks decreased 14.9pc to Rs147.8bn for 2018-19. The sector dragged down the KSE-100 Index as its weight in the benchmark is 26.9pc. A major issue that stunted growth in the banking sector was non-performing loans (NPLs) that saw a significant surge in two years. Total bad loans stood at Rs697bn in June, up 24pc from a year ago, according to a major brokerage firm.
With the index weight of 16.5pc, the fertiliser sector was also adversely affected. The sector saw its bottom line dip by 4.1pc to Rs68.2bn.
The decline in earnings in the cement sector was 33pc for 2018-19. They amounted to Rs31.7bn. Its weight in the index is 5.4pc. The recent uptick in stock prices of cement companies shows some cyclical improvement. The cement sector has posted growth of 2.32pc that lifted the volumes to 11.11m tonnes for the first quarter of 2019-20 from 10.85m tonnes a year ago. Cement despatches increased 27.9pc month-on-month to 4.27m tonnes and 11.56pc year-on-year in September.
Brokerage Arif Habib Ltd in its report on corporate profitability and its impact on the market stated the KSE-100 Index plunged by 8,009 points (19.1pc) in 2018-19. The downside was attributed to exploration and production companies, which shed 1,153 points, followed by commercial banks (1,077 points), cements (1,051 points) and oil and gas marketing companies (921 points).
Several sectors posted profit declines, but their losses did not make much of an impact on the index given that their weight in the benchmark was too low.
Automobile assemblers saw their earnings dip by 36.9pc year-on-year to Rs21.7bn. There was a plunge of 46.2pc to Rs965m in the net profit of cable and electrical goods companies. Earnings of engineering firms went down 28.7pc to Rs4.2bn, paper and board companies 63.2pc to Rs1.9bn, synthetic and rayon 52.6pc to Rs998m and leasing companies 25.9pc to Rs1.0bn. Pharmaceutical companies collectively lost 18pc earnings, which amounted to Rs7.2bn in 2018-19. Tobacco companies suffered a loss of 28.3pc in net earnings, which amounted to Rs10.3bn. Yet the sector contributed 132 points to support the index.
Insurance companies, which have been under pressure for the past three years, saw a further fall in profits by 30.7pc to Rs3.4bn. The power generation and distribution sector recorded profits of Rs27.5bn, up 12.5pc from the preceding year. Incidentally, one of the most profitable sectors, food and personal care products, also bore the brunt of a bad year, with a 43.3pc decline in earnings to Rs7.6bn.
According to a major brokerage house, the profitability of the food sector for Jan-June shrank 36pc year-on-year while its net margin slid to 5pc from 8pc last year. The sector’s revenues grew by a tiny 3pc in the six-month period owing to the ongoing slowdown in national economic activity. Ex-Nestle, the sector’s revenues improved 13pc year-on-year. Moreover, cost-push inflation shrank gross margins by 425 basis points on an annual basis to 25pc as food companies preferred volumetric increases to price hikes.
On the flip side, sectors that remained profitable during 2018-19 included technology and communication that went up 123.7pc to Rs7.3bn, investment banks 89.8pc to Rs118m and leather and tanneries 48.2pc to Rs1.3bn. However, the collective weight of the three sectors in the KSE-100 Index is barely 2pc.
Analysts at Arif Habib Ltd noted that during the fourth quarter of 2018-19, miscellaneous companies (up 225pc), leather and tanneries (up 150.2pc) and tobacco companies (up 63.8pc) led the earnings chart of the index. The sequential downturn in the bottom line of the KSE-100 Index was 6.5pc quarter-on-quarter, which was led by cement and power stocks that went down 73pc and 45pc, respectively. In the fourth quarter of 2018-19, the KSE-100 Index declined by 4,748 points, or 12.3pc, owing to oil and gas exploration companies and banks that lost 855 points and 759 points, respectively. Fertiliser stocks added 648 points to the overall index decline.
Published in Dawn, The Business and Finance Weekly, October 7th, 2019