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Corporate profits a silver lining in the economy

Updated March 11, 2013

FOR equity shareholders, things have never been so good. They have enriched themselves with phenomenal capital gains from soaring stock prices, as well as robust company payouts.

As the winter results reporting season draws to a close, corporate profitability is seen to have recorded an impressive earnings growth of 31 per cent in the quarter September from December 2012, over the previous quarter (July-September) – or QoQ.

Meanwhile, directors have come out beaming from board rooms, after having approved handsome dividends.

“Regardless of the power shortage, deteriorating law and order condition, political uncertainty with elections just a short way ahead, and fresh local and foreign investments in industrial ventures at a low ebb, companies registered a remarkable growth of 31 per cent QoQ,” said Khurram Schehzad, head of research at Arif Habib Securities.

The cement sector emerged as the star performer during the quarter, as it posted a collective earnings increase of 21 per cent, to Rs5.6 billion from Rs4.6 billion in the prior three months. For the half year 2012 (1HFY12) from July to December, cement companies reported stellar growth of 95 per cent in their profit after tax (PAT). The PAT swelled to Rs10.3 billion from Rs5.3 billion in the corresponding period of the previous year. Higher sale prices improved margins, which were glossed over by the decline in international coal prices.

Aizaz Mansoor Sheikh, the chairperson of the All Pakistan Cement Manufacturers’ Association (APCMA) and that of Attock Cement, expressed his pleasure over the sector’s performance in the latest quarter.

He told Dawn that the major reason for the sparkling financial figures was the narrowing of gap between demand and supply, as dispatches had been scaled. Capacity utilisation had mounted to 75 per cent, which, Mr Aizaz, said was satisfactory even by international standards. The Aptma chairperson hoped that such good times would continue for the cement companies possibly for the next two years.

Meanwhile, the banking sector’s performance was in sharp contrast to that of the cement sector. During the quarter, the sector’s earnings dipped eight per cent in the quarter, to Rs14.6 billion from Rs15.9 billion in the earlier three months. Zubyr Soomro, former country manager of Citibank, who now runs Hikmah Consulting, stressed that basic economic fundamentals were going to be reflected in the banking sector sooner or later. He pointed out that after the global financial crisis, banks everywhere, including in Pakistan, had developed a low risk appetite. Therefore, their deposits were rising, but they preferred to invest in government papers and appeared shy of lending to the private sector, leading to stunted growth.

For banks, net interest spreads were also squeezed during the year, though mainly in the latest quarter, on account of an increase in the minimum PLS rate, and a 250bps cut in the policy rate.

On the other hand, the textile sector, which had been in the limelight for almost a year now for having reawakened from its deep slumber at the stock market, justified the hefty rise in its stock prices by racking up an increase of 50 per cent in the 1HFY12 profit to Rs2.9 billion from Rs1.9 billion in the same period last year. Sustained product demand, more exports to greener pastures (China), and rupee depreciation all contributed to a turnaround in textiles, which is the country’s largest industrial segment.. Also, favourable input prices improved gross margins, which, in turn, added to the bottom line. Moreover, healthy dividends from associated companies added to company earnings.

Telecoms also jumped out of the red of Rs8.3 billion in the earlier quarter, to Rs9.4 billion in the latest three months, as the sector benefited from a favourable change in the regulatory regime. These changes included the granting of permission to form the International Clearing House. PTCL, the biggest player in the local telecommunication sector, benefited from stable revenues from its subsidiary, Ufone, as well as a reversal of Rs1.53 billion provided for Voluntary Separation Scheme (VSS) in the fourth quarter.

A growth trend was also witnessed in the Oil and Gas Exploration and Production (E&P) sector over the half year, as earnings rose by 14 per cent to Rs77.2 billion from Rs67.9 billion. However, QoQ earnings went from Rs39.5 billion to Rs37.7 billion. The quarter earnings dropped mainly on account of a seven per cent QoQ decline in gas production, as well as rising exploration costs.

Oil Marketing Companies (OMCs) also underperformed, as the sector’s profits plunged by 46 per cent QoQ to Rs2.9 billion, from Rs5.5 billion. “In spite of a 51 per cent higher ‘other income,’ and 38 per cent lower ‘financial charges,’ the sector posted a QoQ earnings decline, mainly on account of heavy inventory losses,” said a sector observer.

Meanwhile, fertilisers were in the eye of the storm for most of the first quarter, mainly due to gas supply shortages. Imported urea also resulted in a contraction of sales. The sector’s earnings dipped by 41 per cent in the 1HFY12 to Rs22.2 billion from Rs37.8 billion in the same six month period a year earlier.

On a QoQ basis, however, the fertiliser sector’s earnings grew by a mammoth 151 per cent, to Rs9.3 billion from Rs3.7 billion, as gas shortage issues appeared to have been sorted out.

The last of the key company results have been unveiled for the quarter ended December 31, 2012. Analysts are sanguine that companies’ earnings streams are unlikely to dry up. “Whereas the overall GDP has grown by an average three per cent in the last five years, corporate earnings have grown on average by an impressive 15 per cent,” said Mohammad Sohail, CEO of Topline Securities. While other factors also contributed to this rise, growing consumer demand was a major factor that enabled companies to pass on their cost pressures, and also helped with volumes, he said.

But for all that, many people, who have little or nothing to do with stocks and listed companies’ earnings, complained that corporate prosperity had done little to boost the economy, or to create more jobs. “The companies continue to cut expenses to the bone, making remaining employees work harder, but adding more names on the payrolls has remained elusive,” said an economist.