Profit fall a wakeup call

Despite a select few reporting highest-ever profits, the combined figure of 210 companies which have released their financials so far reveals a concerning trend.

The cumulative earnings for the quarter ended on 31 December 2011 was Rs. 40.6 billion, up by only 0.56% year-on-year according to broking sources who have tracked corporate results. The 210 includes almost all major companies including big commercial banks which all released their fourth quarter results this week.

Some said the downward trend was apparent from a few quarters earlier. For example, the September 2011 quarter earnings showed a lower 14.4%, down from 36% growth in the preceding quarter and 72% in June quarter. However, on a quarter-on-quarter basis, earnings had declined by 15% in September 2011 comparison to a 7.5% QoQ drop in the second (June) quarter of 2011.

Analysts said that the trend was worrisome and exposed the underlying deteriorating conditions in the overall macroeconomic setting.

“The December 2011 quarter data confirms the trend and even when full computation of all listed companies results are factored in, negative growth is likely. This reinforces the fact that the post-war momentum is fizzling off and growth prospects will be flat unless the economy and the private sector re-engineer themselves,” they added.

It was emphasised that with the natural end-of-war-stimulus ending, companies must expand capacity and efficiency.

“Therein lies the true challenge for the Government and the private sector. Given the current situation, with the uncertain exchange and interest rate regime, as well as costs rising following the revision of fuel and energy and other prices, the scope for improved earnings is bleak,” they added.

“It is important for the Government to realise the true health of the economy and the macroeconomic fundamentals and accordingly take appropriate action rather than fire-fighting or doing patchwork, which often borders around inconsistent policies and tinkering,” analysts warned.

Most commentators have faulted the Government for its misjudgement and resultant mismanagement of certain macroeconomic fundamentals, including reserves, credit and consumer demand growth. Eventually an artificially-high currency had to be brought down to earth, i.e. devalued. Even after realisation of the true status quo, the Government’s policy response and action have been inconsistent and contradictory and at times included policy reversals.

“All these are sending wrong signals from the economic front,” analysts warned.

They also opined that the larger danger was further misjudegment or mismanagement, which could see the crisis spiralling out of control.

This is something the Government must avoid especially when the global situation remains fragile. “There is an urgent need for honest assessment of the realities and taking of serious and credible action,” it was emphasised.

Analysts recalled that in November the Government took the view that the true value of the rupee was Rs. 113, but come a few months later after some policy inconsistencies, the rupee value had deteriorated to the Rs. 123 level to the dollar. This major lapse in judgment only fuels further speculation in forex markets and the talk of the exchange rate hitting Rs. 130 looks credible.

Wednesday’s revision of outlook and ratings by Standard and Poor’s as well as concerns expressed by Fitch on top of other global economists reinforces the underlying problem the Lankan economy faces, analysts said.

Despite the gloom-and-doom forecast, other analysts remain optimistic that the country still has scope to remain robust largely on the basis that there is no war, which destroyed growth and wealth, apart from other negativities.

“The country has hardly harnessed its true potential as well as vast new resources and opportunities following the end of the conflict three years ago. If this is done, the envisaged 8% growth is possible despite shocks,” they argued, despite adding that such dynamism would require some decent policy framework and consistency apart from business-friendly facilitation.

Another key take from the current apparent unfertile environment is the fact that in the first two financial years since the end of the conflict, the private sector had feasted on profits by way of hefty dividends rather than investing in the future. Those who had retained earnings were also slow to reinvest. Another criticism against the private sector is its lack of foresight in correctly reading economics and failure to be prepared for reversal of good times.