Corporate earnings suffer first dip since 2020

• Capital Goods, Transportation, Telecommunications and Diversified Financials sectors sapped December 2022 quarterly earnings
• 2022 full year earnings of listed companies however rose by 28% to a record Rs. 596 b

The December 2022 quarter earnings of listed companies suffered their first decline since 2020 by 44% to Rs. 96.4 billion, according to First Capital Research.

The results were for 281 listed companies and First Capital said the dip was owing to sluggish performance primarily in the Capital Goods (-82.6%YoY to Rs. 5 billion), Transportation (-87%YoY to Rs. 3 billion), Telecommunications (-226.8%YoY to a loss of Rs. 9.6 billion) and Diversified Financials (-38.9%YoY to Rs. 20.3 billion) segments.

The December 2022 quarter also puts an end to seven consecutive quarters of ear nings growth enjoyed by the companies.

However upbeat quarterly performance was only witnessed in the Energy (14,183.9%YoY to Rs. 12.8 billion), Banking (38.9%YoY to Rs. 30 billion), Food, Beverage and Tobacco (12.3%YoY to Rs. 26.6 billion) and Utilities (28.1%YoY to Rs. 2.1 billion) sectors.

First Capital said Capital Goods saw an 82.6%YoY decline to Rs. 5 billion  largely driven by the poor performance of Browns (-3430.4%YoY) and HAYL (-99.6%YoY) due to the significant rupee depreciation which caused a significant increase in the cost of materials resulting in higher working capital requirements, increase in market rates, foreign currency risk, and curtailed supplier credits by foreign suppliers due to the credit rating downgrade by international credit rating agencies following the economic instability of Sri Lanka.

The Transportation sector recorded an 87%YoY decline to Rs. 3 billion primarily led by Expolanka Holdings (-87%YoY) due to the reduction in operating volumes across both air freight and ocean freight products, led by the overall slowdown in global trade volumes impacted by high inventory levels, inflationary fears and the global energy crisis.

Telecommunications sector also witnessed a downfall in net income by 226.8%YoY to a loss of Rs. 9.68 billion largely led by Dialog (-280.8%YoY) owing to the devaluation of the rupee that escalated operational costs due to tariff revision of mobile, broadband and pay TV by 20%, 20% and 25% respectively with effect from September 2022, in line with the approval granted by the Telecommunication Regulatory Commission of Sri Lanka.

On the other hand, Diversified Financials sector earnings dipped by 38.9%YoY to Rs. 20.3 billion mainly due to the losses made in LOLC (-41.8%YoY) as a result of a significant impairment adjustment for its fair value measurement of financial assets primarily in the financial services and manufacturing and trading segments. The lacklustre performance in this sector during the quarter was also driven by an increase in corporate tax rates to 30% from 24% w.e.f. effective from October 2022.

The Energy sector recorded a growth of 14,183.9%YoY to Rs. 12.8 billion largely driven by excellent performance of Lanka IOC which recorded an increase in earnings of 825.4%YoY to Rs. 8.2 billion aided by the fuel price revision formula, fall in global crude oil prices and an upward price revision of Auto Diesel by Rs. 15 to Rs. 430 during the month of November 2022.

The Banking sector witnessed a profit surge of 38.9%YoY to record Rs. 29.9 billion led by Commercial Bank of Ceylon which saw a significant increase in net income by 68.2%YoY to Rs. 8.8 billion. This was assisted by the impact of the sharp depreciation of the rupee on foreign currency loans and advances amidst a sharp decrease in credit to the private sector.

The depreciation also resulted in an increase of interest-earning assets, higher foreign currency income, increased cost of living and a rise in interest rates on rupee deposits which resulted in the shift from low-cost funds to high-cost funds.

The Food, Beverage and Tobacco sector earnings gained by 12% to Rs. 26.5 billion due to improved performance in DIST (193.3%YoY) and MELS (125.3%YoY) which were aided by high food inflation.

Despite slump in quarterly earnings, the 2022 full year earnings of listed companies rose by 28% to a record Rs. 596 billion, according to Softlogic Stockbrokers’ analysis released last month.

It said CSE market earnings excluding telcos, grew by 44% YoY to reach a new all-time high, despite Q4 being riddled by high interest rates and taxes.

Effective repricing strategies ensured strong revenues despite the slowdown in 4Q, which thus resulted in a strong earnings growth so far for 2022.