Corporate earnings hit hard by poor consumer sentiment

Sri Lanka’s corporate earnings sank during the second quarter as business and consumer sentiments turned sore on higher taxes and interest rates, amid inflation hitting almost all sections of society, undermining the economic growth, according to a quarterly earnings update by First Capital Research.

But the banks and insurance companies ploughed ahead with stronger earnings, albeit slowly.  

Sri Lanka’s listed company earnings fell 10 percent during September, from the same period, last year, primarily on the sluggish performance in the food and beverage sector as consumer wallets ran shallow amid weaker disposable incomes. 

“The lacklustre performance in food, beverage and tobacco, telecommunication and materials sectors was mainly owing to the lower consumer spending stemmed from subdued economic growth,” said First Capital Research.

The food, beverage and tobacco earnings were down 31 percent year-on-year (YoY) while the telecommunication and materials sector earnings were down by 36 percent YoY and 68 percent YoY, respectively. 

The total market earnings for the July-September quarter was Rs.54.4 billion, compared to Rs.60.5 billion in the year earlier period. 

This is the second consecutive quarter where company earnings turned south after the earnings in the June quarter fell 10 percent over the same period, last year. 

The profit at some of the biggest players in the food and beverage sector such as the John Keells subsidiary, Ceylon Cold Stores PLC, saw their profits plunging due to lacklustre demand. 

In the telecommunications sector, the heavy depreciation in the rupee against the dollar caused Dialog, Sri Lanka’s largest mobile telephony player, absorbing a hefty forex loss on its euro loans, resulting in a 54 YoY percent decline in earnings. 

Meanwhile, the material sector earnings were pulled down by Tokyo Cement’s 90 percent dip in earnings on slowdown in economic activities. 
However, the banking and insurance sector continued to grow its earnings, posting a 14 percent YoY growth in after tax profits to Rs.17.7 billion, for the three months under review. 

Commercial Bank, HNB and Sampath Bank together contributed three quarters of the total banking sector earnings, First Capital Research said. 
“Improved earnings during the quarter was resultant to higher interest rates prevailed in the market thereby improving margins and spreads, which negated the effect of increase in impairment provisioning under IFRS 9,” said First Capital Research, which is part of a fully-fledged investment bank. 

However, most banks incurred heavy credit costs as their asset quality weakened across the board with some reporting substantially higher non-performing loan ratios.

Meanwhile, the Sri Lankan companies, which became leveraged during periods of low interest rates, are now paying thumping borrowing costs on their loans as rates have markedly risen. 

With the continued weakening of the rupee, rising interest rates and inflation together are having an adverse impact on the consumers and corporate alike. 

Sri Lankan corporate earnings are unlikely to return to the growth territory in the near term.