WITH the summer results season now all but over, corporate profitability in the second quarter of calendar year 2014 was noted to have recorded a big growth of over 40pc over the same time last year. It was one of the fundamental reasons for the dominance of bulls at the stock market.

Meanwhile directors came out beaming from board rooms after having approved handsome cash dividends, and, in some cases, bonus issues. While the investors celebrate earnings and payouts that have tossed stock prices generally higher, people who have little or nothing to do with stocks or listed companies complain that corporate prosperity has done little to boost the economy or create more jobs.

“The criticism holds water. Yet, under tough economic conditions, delays in the IMF review, threat to the rupee’s stability, re-piling of circular debt and all the problems exacerbated by the floods in Punjab, the corporate sector has to be given a pat on the back for having done exceedingly well,” says economist Mohammad Zubair.

Oil and gas exploration and production companies (E&Ps) and banks stood out as star performers in terms of earnings growth in the second quarter (2QCY14). Several brokerage firms that monitor earnings arrived at slightly varying figures, depending on the number of companies they covered.

Growth in cumulative corporate profit was primarily driven by oil and gas (E&P) companies and banks

“During April-June, the corporate sector posted its highest-ever profit of Rs116.1bn, representing a stellar growth of 44pc over the same time last year (YoY). The earnings were up 14pc over the previous quarter (QoQ),” says Raza Jafri, head of research at AKD Securities.

He affirmed that the growth was primarily driven by E&P companies and banks, but observed that excluding these two heavyweight sectors, growth had flattened; the drag being caused by fertilisers, independent power producers and textiles.

“There are, however, encouraging takeaways,” and pointed out that the consumer sector posted earnings growth of 30pc YoY and 3pc QoQ, while the automobile sector’s profitability surged by a sharp 52pc QoQ. Both sectors reflected a pickup in underlying demand, he added.

An analyst at Foundation Securities, Nauman Khan, came up with an almost similar analysis. “In 2QCY14, corporate profitability [based on the Foundation Securities universe] grew by 35pc YoY and 16pc QoQ.” He concurs with Jafri’s findings that major growth accrued from the E&P and banking sectors, while fertiliser and oil marketing companies were a blot on the corporate bottom line.

Regarding the E&P sector, Nauman expected earnings growth in the quarter ending September (1QFY15) to remain steady on account of strong growth in oil production.

“Going forward, continued growth in oil production, strong cash position, ramp-up in exploration activity, weakening rupee-dollar parity and the combined annual growth rate (CAGR) from FY14 (actual earnings) to FY16 (forecasted earnings) of 11-13pc remains key pillars of our conviction about the E&P sector.”

Meanwhile, banking sector analyst at Topline Securities, Zeeshan Afzal, reported that profits of listed banks in the first half of CY14 have risen 35pc. “The growth stems mainly from higher non-interest income and low provisions,” he said, and pointed out that HBL — with profit growth of 49.6pc YoY to Rs14.5bn in 1H2014 — was ahead of its peers.

With regards to the fertiliser sector, Iran Ahmed Patel, an analyst at Global Securities, noted that on a cumulative basis, total urea off-take remained muted at 3.677m metric tonnes during eight months of CY14, against 3.689m MT over the same period last year, leading to modest performance of fertiliser companies.

As for the cement sector, “Earnings growth clocked in at a steady 10pc YoY in FY14,” said Furqan Ayub at JS Global in a September 25 report. The analyst ascribed this to a 10pc yearly uptick in revenues and a decrease of 25pc YoY in financial charges. He asserted that due to a high base of cement prices, earnings growth in FY14 was modest compared to FY13’s staggering rise of 74pc YoY.

Mohammad Ali Amin, cement sector analyst at KASB Securities, observed that “Key drivers for stronger margins ahead are declining trend in coal prices, expected growth in local off-take and anticipated increase in cement prices”.

Regarding trends in the textile sector, Abdul Azeem at Invest Capital lamented that total textile exports had dipped 5.2pc YoY to $2.17bn in July-August, against $2.29bn in the same period last year.

Dilating on the performance of oil marketing companies (OMCs), Muhammad Saad Ali, an analyst at KASB Securities, observed in a September 18 report that “Earnings of OMCs are expected to remain under duress in 1HFY15 owing to a dip in consumption of high-speed diesel amid floods in Punjab; declining oil prices causing heavy inventory losses; lower furnace oil sales during winter and possible exchange losses as the rupee continues to depreciate”.

For the auto sector, analyst Mohammad Tahir Saeed at Topline Securities maintained that the “medium-term outlook looks healthy after key decisions taken in the federal and provincial budgets 2014-15”. The analyst believed that budgetary measures, along with the Japanese yen’s drop against the rupee, would support the profits of local auto assemblers.

Meanwhile, AKD Securities’ Raza Jafri said “while floods may impact 3QCY14 performance for selected sectors like cements, overall corporate profitability is expected to retain its secular uptrend going forward, with the three-year CAGR being at 18pc”.

Published in Dawn, Economic & Business, October 13th, 2014