Corporates maintain earnings streak despite runaway inflation, economic crisis

• Listed corporate earnings have grown 87% through September 2022 on TTM basis 

Much of 2022 has been a wild ride for Sri Lanka but if there was a single segment, which for the most part withstood the economic adversities so far this year, that was corporate earnings. 

Although the economy has been through much with prices reaching hyper inflationary levels, causing margin pressures and lingering foreign exchange shortage disrupting operations, Sri Lanka’s listed companies have delivered relatively robust earnings in the year through September. 

According to CT CLSA Securities, which parsed the quarterly earnings reports of the firms listed on the Colombo Stock Exchange (CSE), Sri Lankan listed corporates have recorded a strong 87 percent growth in earnings through September 2022, on a trailing 12-month basis, reflecting that the companies are still defending their bottom lines albeit with many challenges.

“Sri Lanka’s corporates have remained resilient,” the stockbroker said in a recent market and macroeconomic report.  

Although the tight monetary and fiscal policies employed since the beginning of this year to rein in runaway inflation, which peaked at 70 percent levels in September, caused people to pull back on what they buy and consume, companies appear to have navigated the rough period relatively unscathed. 

With the exception of a few segments such as banking and financial services sector, consumer durables and capital goods, which are mostly sensitive to economic cycles, the rest of the segments managed to still push their top lines higher. 

FMCG, retail, energy, utility and healthcare are some of the sectors that were able to remain resilient amid a faltering economy, as the hotter inflation enabled them to pass down most of the cost inflation they were facing to the end consumer, although some limitations emerged in recent times in doing so. 

Although business volumes came down sharply this year, in response to inflation and other restrictive policies, top lines received a boost from the higher prices these companies charged to defend their margins to the extent possible.   

Meanwhile, those companies that generate foreign currency incomes or have units that generate incomes in foreign currency, were largely insulated from the majority of the issues faced by their peers, who were only focusing on the domestic market.  These were the companies that largely managed to maintain their valuations this year while others saw their stock prices crater on the back of the extremely high interest rates and the taxes, which would further crimp their bottom lines.  “From a stock picking point, we believe corporates that have consistently had positive operating cash flows will be successful in navigating the storm over the next few months,” CT CLSA said.

Meanwhile, 2022 also marked the highest foreign inflows into the CSE in 10 years, with Rs.24.6 billion equivalent of foreign inflows coming in through December 16, reversing the years-long trend of net outflows of foreign investments from the Colombo bourse.