Listed company earnings slow in 2Q amid weaker consumer demand

Sri Lanka’s listed companies saw their earnings growth slowing during the most recent quarter as corporate performance across most sectors was hurt by weaker consumer demand and slowing economy.  

Sri Lanka’s corporate earnings during the April-June quarter (2Q17) grew by 4.6 percent year-on-year to Rs.54 billion, much slower than the 11.7 percent growth recorded in the January-March quarter (1Q17), according to the quarterly earnings update released by CAL Research, an independent equities research house under Capital Alliance Group.    

The cumulative earnings of the listed entities on an absolute basis also came down by a significant Rs.24.3 billion quarter-on-quarter (QoQ) as the March quarter earnings were recorded at Rs.74.3 billion. 

The second quarter earnings season was marred by poor consumer demand resulting from higher interest rates and indirect taxes and thus the financial results were expected to be largely depressed and offered no surprises. 

The earnings slowdown is a clear gauge of the slowdown in the economic activity in the country. 
The Central Bank revised down its growth projections for the economy several times to around 4.5 percent this year as its tight monetary policy gradually takes hold. The government is also seen squeezing its fiscal spending reluctantly, heeding to the International Monetary Fund’s conditions, to keep the three-year loan programme on track.  

As usual, banks, finance and insurance sector contributed with almost half of 
these earnings. 

This was followed by the diversified holdings sector and beverage, food and tobacco sector with 17 percent and 13 percent contributions, respectively. 

Commercial Bank of Ceylon PLC, Sampath Bank PLC and Hatton National Bank PLC became the largest individual contributors to the 2Q17 earnings, accounting for 6.0 percent, 5.4 percent and 5.3 percent of total earnings. 

This demonstrates the banking sector retaining its place as the leading profit maker despite the hostile conditions hurting most companies in other sectors, a conundrum which has remained true through economic cycles. 

The expansion in banks’ loan books during the 1H17 on the back of a high demand for private sector credit helped these earnings, CAL Research said. 

Ceylon Tobacco Company and Lanka Orix Leasing Company were the next two biggest contributors to the earnings with 4.6 percent and 4.5 percent, respectively. 

Meanwhile, for the 12 months ended in June 30, 2017, the total market earnings grew by 14.6 percent to Rs.249 billion over the preceding 12 months. 

Sri Lanka’s corporate earnings are expected to remain subdued over the 2H17 as no major shift in macroeconomic conditions is expected during the remainder of the year albeit some bump could be expected during 4Q17 due to traditional seasonal demand kicking in.