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KARACHI: The KSE-100 index companies profits have increased by 10.8 percent in spite of COVID-19-led lockdowns in 2020 to Rs707 billion, higher than last 10-year and 5-year CAGRs of 9 percent and 4 percent, respectively.

Within this, privately managed companies profits have increased by 23.2 percent in 2020, which is also higher than last 10-year and 5-year CAGRs of 11 percent and 4 percent, respectively.

On the other hand, government-managed companies' profits declined by 15 percent in 2020 compared to last 10-year and 5-year profit CAGR of 4 percent and 5 percent, respectively.

KSE-100 profit growth in 2020 also outperformed regional peers profitability growth, as India posted a decline of 14 percent followed by Sri Lanka's drop of 8 percent. Growth in Vietnam profits remained flattish.

"Our 10 year analysis is based on current composition of KSE-100 companies and data of 87 companies that represents 95 percent of KSE-100 market cap," a research report of Topline Securities said.

"While for 2020 growth we have taken 96 companies that represent 98 percent of market cap," the report added.

The companies which are not part of this analysis are either due to unavailability of historical data (due to recent listings) or nondisclosure of recent results.

"Our analysis suggest that adding these missing companies of KSE-100 will not materially impact profitability growth/trend of 2020 or 10 years," the report said.

In absolute terms, banks contributed highest increase in profits to the extent of Rs58 billion (or up 34 percent) as increase in deposits, repricing mismatch between assets and liabilities and higher capital gains more than compensated for higher provisions.

Other major contributors were fertilizers (Rs28 billion, up 49 percent) and technology (Rs4.7 billion).

Tech profits increased due to growing scope of technology during the pandemic, resulting towards higher sales. Similarly, change in accounting treatment of TRG Pakistan (TRG) also helped sector to achieve good results. In percentage terms, the steel sector witnessed highest increase of 130 percent in profits due to increase in GP margins and sales volumes along with lower finance cost.

Cement profits increased by 45 percent or Rs5 billion due to combination of reasons like lower finance cost, higher volumetric sales and increase in retention prices.

Pharmaceutical sector profits increased by 43 percent due to increase in GP margins and net sales of the companies. Gross margins of the sector improved due to annual price increase in line with CPI along with the absence of any major cost pressure due to stability of currency.

FMCG profits increased by 33 percent in 2020 mainly led by higher sales that occurred due to higher consumption of consumer items as Covid-led lockdown restricted people to their homes.

Energy sector (E&Ps and OMCs) was a major drag to the KSE-100 index profitability.

E&Ps: Profits declined by 13 percent or by Rs28 billion due to fall in international oil prices by 36 percent to $42.1/barrel in 2020. Other than this, hydrocarbon (oil and gas) production also remained lower due to disrupted operations of the fields amidst COVID-19-led lockdown.

Earnings decline was contained to 13 percent as exploration cost of the listed E&P companies came down by 45 percent to Rs30 billion.

OMCs: Hascol Petroleum (HASCOL) has been excluded in this analysis as the company has not yet announced December-2020 results. OMCs sector turned into losses of Rs6.6 billion from profit of Rs15 billion due to heavy inventory losses as international price fell sharply.

"If we add HASCOL then loss of the sector will increase to Rs30 billion (assuming HASCOL loss at Rs24 billion in 2020), up from loss of Rs11 billion in 2020," the analyst said.

TEXTILES: Profits declined by 24 percent due to halt in exports as major economies around the globe were under lockdown that restricted cross border movement of goods. Textile exports declined by 7 percent in 2020 to $12.6 billion, as per the SBP data.

REFINERIES: The sector continued its losses for the third consecutive year. Sector losses clocked in at Rs4.4 billion in 2020 compared to loss of Rs4.9 billion in 2019. Continuation of losses is attributed to significant fluctuation in oil prices and declining GRMs.

Over the last 10 years, highest earnings growth of 22 percent was seen in 2012 which was led by oil exploration and production (E&P) companies whose profits cumulatively increased by Rs37 billion or 30 percent.

The other major contributor to 2012 profits growth was the cement sector that added an incremental amount of Rs15 billion to the overall profits.

Based on 10 year data, insurance, pharma, fertilizer, banks, FMCG and chemical sectors have posted profit CAGR of 9-21 percent. Similarly, adjusted for base effect, IT and steel sectors have posted 8-year profit CAGR of 26 percent and 24 percent, respectively.

On the other hand, sectors like autos, cements and textiles posted relatively lower CAGR in range of 1-8 percent.

Refineries and OMCs have underperformed during the same period as both the sectors have posted losses in 2020.

INSURANCE: Insurance sector profits have grown at CAGR of 21 percent in the last 10 years due to substantial rise in their overall AUMs mainly in life insurance companies.

PHARMA: Pharma sector has posted 10-year profit CAGR of 16 percent due to rising sales and successful implementation of inflation-indexed price increase formula.

BANKS: Banks have posted 10-year profit CAGR of 11 percent due to persistent rise in their assets size and continuation of higher IDR ratio that reduces stress on balance sheet.

OMCs: OMCs have underperformed relative to other sectors as companies have posted losses in 2020 due to high volatility in oil prices that resulted in inventory losses.

REFINERIES: Refineries have also underperformed compared to other sectors as it is posting loss for the third consecutive year due to volatile oil prices, exchange losses, and lower GRMs.

Based on data, Pakistan's KSE-100 index companies have posted CAGR of 5 percent (our calculation suggests 3.3 percent) which is higher than India's Sensex companies CAGR of 1.0 percent and Sri Lanka's CSE CAGR of 3 percent. Vietnam's VN posted CAGR of 5 percent during the same period, higher than Pakistan.

Adjusting currency depreciation, Vietnam and India have done better compared to Pakistan and Sri Lanka.

India's profitability was dented by 14 percent in 2020 due to COVID-19-led lockdown which resultantly restricted economic activities across the country. Excluding 2020, in the last four years, India has posted profit CAGR of 5 percent.

Corporate earnings in Sri Lanka are declining for last three years primarily due to weakening economy which limited overall consumer spending, as per news reports.

Low spending resulted from currency collapse, credit contraction and bad loans along with Easter Sunday attacks targeting tourism.

Vietnam has outperformed regional peers in terms of profits by posting 5 year CAGR of 7 percent. In 2020, corporate earnings of Vietnam remained flat. Excluding 2020, in last four years, Vietnam has posted profit CAGR of 9 percent.

Copyright Business Recorder, 2021

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