Rejuvenated by change of guard in the political set-up, the KSE-100 provided return of 52 percent, 44 percent in US dollar terms in the year ending by June 2013 overlooking the prevailing energy and security crises.
In addition to elections, the market participants were also bullish on corporate earnings growth. However, profits fell contrary to expectations.
Though cement, OMC, textile and power sectors posted impressive profit growth, negativity brought in by heavyweights like fertilizer, E&P and banking sectors proved too much for them to sustain.
Resultantly, corporate profitability declined by 3 percent which compares unfavorably against 5 and 10 year average Pakistan corporate profitability growth of 10 percent and 13 percent respectively,” said the analysts at Topline Research.
“We base our analysis on Topline sample of 27 companies, representing 64 percent of the KSE-100 market cap,” said Asad I Siddiqui.
According to which, corporate earnings in FY13 were recorded at Rs 326.5bn (US$3.4bn) vs Rs337.6bn (US$3.8bn) in FY12, down 3 percent (11% in US$). Interestingly, this entire decline took place in the 4QFY13.
FY13 can be classified as one of the worst years for fertiliser sector as its profits declined by 22 percent or Rs10.4bn.
The 17 percent decline in production due to gas curtailment remained the prime reason, while higher differential between local and imported fertilizer (urea) also dented the profitability.
However, the biggest shock in FY13 remained the E&P sector performance as higher exploration expense (due to expensing out dry wells) and increased effective tax rate led to erosion of profits of Pakistan oil and gas explorers by 4 percent or Rs6.1bn.
“The banks’ profits were down by around 8 percent or Rs6.5bn as spreads squeezed to multi-year low of 6.53 percent owing to 300bps decline in interest rate on one hand and fixing of MDR (minimum deposit rate) at 6 percent on the other,” viewed Asad.
The main sectors that supported the corporate earnings growth were Cements and OMCs as they posted profit growths of 52 percent or Rs5.8bn and 25 percent or Rs3.3bn, respectively.
The cement sector profitability growth was driven by price appreciation and decline interest expense, while OMCs profits were bolstered by improved margins, especially on regulated products.
In addition to these two, textile and power sector also posted impressive gains on the back of average 8 percent PKR devaluation against US$, where textile companies received boost from stable cotton prices and solid regional demand.
Interestingly, entire decline of Rs 11bn in FY13 corporate earnings took place in the final quarter with E&P sector woes having their toll on the profitability. Apart from higher exploration expense higher effective tax rate in 4QFY13 resulted in sector’s profits going down 33 percent or Rs12.7bn.
Thus after posting earnings decline of 3 percent, corporate profits are expected to bounce back in FY14 with growth of 20-25 percent.
“Our estimation suggests that impressive performance by E&P and banking sectors will drive corporate profitability going forward,” said the analyst.