March quarter corporate earnings get rupee devaluation boost

• FCR identifies Rs.80bn in net foreign exchange gains for the quarter
• March could perhaps end the double-digit earnings growth streak as SL enters recession 

The foreign exchange revaluation gains bolstered an otherwise challenging quarter for listed entities in Sri Lanka which were hit by foreign exchange and commodities shortages, daily power cuts and inflation, while banks set aside massive provisions from their profits expecting the worse from the economic crisis.  

According to First Capital Research (FCR), a Colombo-based research firm which tracks the cumulative earnings, 276 listed companies reported total earnings of Rs.262.2 billion in the January-March quarter, recording 134.9 percent growth over the same quarter in 2021. 

On a quarterly basis, the cumulative earnings in the most recent earnings quarter gained 51 percent. During a closer analysis of the select dollar sensitive counters, FCR identified Rs.80 billion in net foreign exchange gains for the quarter made by such companies. 

This could perhaps become the final quarter where listed companies in Sri Lanka may be reporting double-digit increase in their cumulative earnings as conditions for businesses are turning from bad to worse in the ongoing quarter with the raging economic crisis which led to political crisis in May giving rise to violence and further economic turmoil. 

The hyper inflation seen at both producer and consumer price levels may have crushed margins while the toplines may have seen a battering as people cut down on consumption after their real incomes were erased by runaway prices.   The World Bank last week estimated the scale of the Sri Lankan economy’s contraction at a shockingly high 7.8 percent for 2022 with any semblance of growth only appearing in 2024, and that also at just 1 percent. 
The higher corporate and Value Added Tax could also weigh on the earnings which came into effect from the current June quarter onwards. 

However, as repeatedly seen in the recent past, which became prominent in the March quarter, companies generating dollar incomes could stand out as they could generate higher incomes when converted into rupees. 
Nevertheless, their sustainability cannot be guaranteed as the global economy led by advanced economies are tipped to fall into a recession, or at least slowdown significantly after their consumers got hammered by decades-high consumer prices, 

worsened by the commodities crunch coming from the self-inflicted inflation stemming from the embargoes repeatedly imposed on Russian oil and other commodities. 

FCR in their analysis identified that, “Food, Beverage & Tobacco, Capital Goods, Diversified Financials and Transportation sectors delivered extraordinary results while the Consumer Services sector,” demonstrating a turnaround of performance in the March quarter. Meanwhile, among the sectors which became a drag on the March earnings were telecommunication, utilities, materials and retailing. For instance Dialog Axiata PLC, the market leader in telcos reported a net loss of Rs.15.8 billion in the March quarter after it booked a foreign exchange loss to the tune of Rs.20 billion on account of dollar denominated debt in the balance sheet.