September corporate earnings end pandemic era growth spurt as crisis took toll

• Defensive sectors helped September earnings to grow by 32% as banks and telcos succumbed 

The growth spurt witnessed in corporate earnings for nearly two years during the pandemic slowed in the quarter ended on September 30, 2022 as the economic crisis and tight policies that followed took massive toll on certain sectors,which under normal circumstances drive corporate earnings. 

According to the data compiled by First Capital Research, the listed company earnings grew by 32.2 percent to Rs.147.6 billion in the July – September quarter from the same period last year.
Although it still reflected adequate growth, it marked a sharp deceleration from the 120.3 percent growth seen in the previous quarter ended in June 2022 and the period during the pandemic.
The pandemic and the burst in demand that followed, predominantly for physical goods in both the home and international markets, set off an earnings spurt from around the third quarter in 2020 which persisted through June 2022.

However, it were the one-off events such as the sharp fall in the rupee against the US dollar that led to the sharp growth in earnings in the first half of 2022.
During this period earnings were supported by the record low interest rates, equally low taxes and the pent-up demand as people who mostly stayed at homes due to sporadic COVID flare-ups in 2020 and 2021 consumed more goods and services.

As a result of the above factors, companies, except in sectors which were more susceptible to COVID related restrictions, such as hospitality, education and entertainment, others reported strong top and bottomlines, leading to sizable gains in their net incomes compared to previous years. 

However, these factors which helped push earnings higher during 2020 and 2021 turned around in 2022 with rates shooting up, taxes rising sharply and demand conditions turning sour after the economy collapsed firing runaway inflation, which took a significant toll on consumption habits.  
However, inflation helped most companies to record elevated toplines although their business volumes slowed significantly as they to a larger extent passed down the higher cost to the end consumer. 

However, higher toplines didn’t directly translate into higher bottomlines as companies, except those who earn in dollar incomes, faced significantly higher cost inflation and borrowing cost. 
According to corporate earnings analysed by First Capital, the September quarter earnings were driven largely by sectors which are identified as defensive such as consumer foods and beverages, energy, material, insurance and capital goods. 
Although not a defensive sector, consumer durables and apparel sectors have also performed well in the quarter.

Meanwhile, the usual earnings leaders such as banks, telecommunication and diversified financials reported declines in their earnings due to combination of factors comprising of higher provisions on account of possible bad loans, elevated provisioning necessitated for the financial assets they held and massive translation losses incurred by telecommunication companies on account of their foreign currency denominated borrowings.
Banking sector earnings fell by 24 percent, diversified financials by 38 percent and telecommunications by 46 percent over the same period a year ago as the crisis took a massive toll on their financial performance.