Analysts forecast gloomy economic outlook for listed entities

• Cite soaring rates, inflation, taxes, fuel and other commodities shortages to batter corporate performance
• Observes significant slowdown in retail sales as consumers cut back on spending
• Retailers cut inventory expecting further demand slump  
• Construction sector decline to further accelerate as material prices skyrocket    

The equity analysts gave a dour outlook for listed companies’ earnings, citing multiple reasons, ahead of the June quarter earnings season, which would kick off shortly, as the companies closed their books for the April-June quarter a fortnight ago.

They cited soaring interest rates, hyperinflation, shortages of fuel and other commodities and higher taxes, which together make up for demand destruction policies, to crimp both the top and bottom lines of the listed entities when they report their earnings from next week.

In a bellwether for what was to come, the earning for the March quarter, stripped off of the non-recurring gains and foreign currency translation profits, decelerated to 11 percent from the December quarter, from an unadjusted 50 percent growth. 

“With the economic downturn and demand destruction, we can expect earnings compression in the future for many sectors, particularly the domestic-oriented industries,” Acuity Stockbrokers said in a March quarterly earnings analysis report. 

“Our data set of leading indicators points to a slowdown in domestic economic activity. Economic contraction was long expected, given the current economic crisis in Sri Lanka and the inevitable austerity measures, which will be necessary to stabilise the economy and return to a sustainable growth trajectory,” the report noted. The Sri Lankan economy is on course to unwind 20 percent of its size from its peak in 2018, giving up at least US $ 20 billion worth of economic output in just two years in 2022 and 2023, undoing a decade worth of progress made.       

This will inflict enormous pain on top and bottom lines of corporates and thereby will see their balance sheets shrinking in tandem with the economy’s contraction.   

In what could be the early signs of earnings compression, Acuity Stockbrokers observed an already slowing retail and construction material sales, which act as close proxies for the overall economy.

Under the worsening conditions, the research house projected the downturn in the construction sector to further accelerate in the coming quarters.

“Construction material sales growth both in nominal and real terms indicate significant tapering off. The downward trend is expected to accelerate in the next few quarters,” Acuity said. It has also been observed that the retailers have cut down on their inventories, which is a sign of expectation of weaker sales in the periods ahead. 

“Lower YoY growth in sales and declining retail inventories in the context of the slowing economy could indicate that retailers expect weaker sales going forward,” Acuity stated.