Solid 1Q earnings season expected with surge in consumer demand

Another solid earnings season is about to get underway as listed companies are set to report their financial performance for the January-March quarter shortly, providing a catalyst for the share market, which took a breather after the wild run in January this year. 

Sri Lanka’s listed company earnings, a barometer for the broader economy got off to a robust start in the July- September quarter in 2020, to reach two-year highs, receiving a sudden boost from the pent-up demand after the economy reopened. 

The earnings logged a robust 53 percent surge from the same period in 2019 to record Rs.73.6 billion. 

Gaining further momentum, listed company earnings reached an all-time high of Rs.85.0 billion in the October-December quarter in 2020, recording 33 percent growth as the broader economy held up defying new restrictions imposed since the start of the quarter. 

There is wider consensus among analysts for the January- March earnings to outdo December quarter earnings.

The pent-up demand is still in motion as people spend on things, which they put off last year.  

While, corporate earnings in the previous two quarters were mostly powered by the sectors related to banking, industrial, healthcare & pharmaceutical, food & beverage and other sectors referred to as stay-at-home sector such as the telecommunications, the January-March earnings could receive a notable lift from consumer related sectors, as it remained a notable absentee until recently, in a meaningful manner.  

Consumer demand is a much bigger force for earnings as well as for the broader economy as it accounts for more than two thirds of the economic output in Sri Lanka.  

While the banking sector would see their earnings upgraded by back-to-back months of solid private sector credit, sectors which are linked to exports, and capital goods & material, would provide an additional impetus for the overall earnings in March. 

Last week Softlogic Research said the current resurgence seen in the broader construction sector would pull many other industries and companies associated with material supplies into the sector, such as cement, tile, aluminium, cable and pipe industries. 

The data also showed that the bulk of the loans to the broader industry sector have also been channelled into the construction sector. The low overall market interest rates and the seven percent housing loans for salaried individuals could be acting as strong enablers for sectors associated with construction, such as capital goods and material.