War bites into Bangladesh corporate earnings

Infographic: TBS

Bangladeshi corporations that showed tremendous resilience during their recovery from pandemic shocks are now in a tight spot because of the Russian-Ukraine war that broke out at the end of February.

The fallout from the war – a combination of such critical elements such as the energy crisis, soaring prices of raw materials, rising dollar prices, inflation and interest rates – is feared to be brewing a "perfect storm" for all economies, including Bangladesh and it has already begun to bite into the profitability of local businesses, say industry people.

In the April-June quarter, 53% of the firms listed on the Dhaka Stock Exchange saw a decline in profits, succumbing to the extraordinary challenges of uncontrollable costs amid demand slowdown, while in the previous quarter, over 65% firms posted profits growth defying the pre-war freight cost hikes, according to an analysis of their quarterly financial statements by EBL Securities Research.

Even big names across industries, such as diversified conglomerate ACI, steel giants BSRM, GPH Ispat, cement makers Crown Cement and Heidelberg Cement, engineering and power conglomerate Energypac, commercial vehicle assembler Ifad Autos, synthetic footwear exporter Fortune Shoes, and food and beverage players such as Rangpur Dairy and AMCL Pran incurred losses in the April-June quarter.

Port operator Saif Powetec, conglomerate Beximco, biscuit market leader Olympic Industries, BSRM Steels, top drugmakers Square and Beximco Pharma, motorcycle manufacturing pioneer and commercial vehicle distributor Runner Automobiles, industrial gas and welding electrode giant Linde Bangladesh, ceramics market leader RAK, lubricant and liquefied petroleum gas giant MJL Bangladesh, haircare market leader Marico, hygiene products giant Reckitt Benckiser Bangladesh suffered earning falls in the very next quarter following the start of the Russia-Ukraine conflict.

Understandably, all the companies have been blaming the adverse economic situation, said equity analyst Rehan Kabir, a senior researcher at EBL Securities.

Economist M Masrur Reaz, chairman of the Policy Exchange of Bangladesh, said even before the Ukraine war, pandemic-caused supply chain disruption, skyrocketing freight rates and soaring prices of some industrial raw materials were hurting businesses and the war just made it worse through dollar appreciation, high energy prices, and a further hike in the left-behind commodities, mostly the agricultural ones.

BSRM Managing Director Aameir Alihussain said in the July-September period, continuous depreciation of taka, sharp hike in diesel-petrol prices, and gas rationing disrupted production and added to energy costs for those who depend on alternative options like diesel-run generators.

Heavy industries like his steel mills suffered 10%-50% production drops due to power cuts and gas rationing, he noted.

Inflation that officially hit over 9% appeared on top of all the challenges in the recent months as ethical employers feel the pressure to pay their workers more, while consumers with their squeezed wallets are not buying non-essentials, said Dr Reaz.

Factories, which need imported raw materials, are spending at least 20% more only because of the dollar price hike, while the global commodity market volatility is further adding to the costs for most raw materials, said ACI Ltd Executive Director for Finance and Planning Pradip Kar Chowdhury.

Despite efficient hedging efforts, the depreciating currency and soaring commodities cost his conglomerate an additional Tk100 crore in the June quarter, he told The Business Standard.

Due to the high costs amid an uncertain situation and rising interest rates, construction in the country has slowed down which is reflected in the volume contraction of cement, steel and paints industries.

The BSRM managing director estimated that steel consumption in the economy dropped by around one-fourth in the July-September quarter.

Masud Khan, adviser to the Crown Cement board, said cement consumption slowed down this year.

Paints market volume contracted by around 7% this year, while the market leader Berger managed to retain its sales due to its market edges and efficiency, said Sazzad Rahim Chowdhury, director and chief financial officer of Berger Paints Bangladesh.

Dr Masrur Reaz said in such situations, all sectors other than consumer staples and essential services face a slowdown.

"The longer high inflation continues the weaker consumers become and that further adds to the slow down until the economy gets better," he said.

Sales of consumer staples are sufficient but the cost pressure squeezed profits, even reaching negative territory for many companies as companies are barely able to pass on all the increased cost to consumers due to competition and government restrictions, said ACI Executive Director Pradip Kar Chowdhury.

Investment banker Ershad Hossain, managing director of City Bank Capital Resources, said the local economy and financial markets are feeling the heat of the global turbulence.

Exporters' worry

Syed Nasim Manzur, vice-president of Bangladesh Association of Publicly Listed Companies, said the inflation-squeezed general consumers always rethink their non-essential purchases, be it in Bangladesh or in the Western world.  

Nasim Manzur, also managing director of the country's footwear export pioneer Apex that has a large market in Europe, said the energy crisis the Ukraine war brought on is going to cost each European family €600-700 more a month this winter for heating. Their monthly mortgage payment sharply increased due to soaring interest rates.

Amid decades-high inflation, western consumers are not ready to spend on their next T-shirt or a pair of shoes, he also said.

Retailers are cutting down orders from source countries like Bangladesh, fearing an excess level of inventory at the end of the season.

Nasim Manzur, also president of Leather goods and Footwear Manufacturers and Exporters' Association of Bangladesh, said footwear orders from Europe to be delivered in the next quarter dropped by more than two thirds.

Prior to the bunch of bad news, exporters were expected to be in a better position as they earn in foreign currencies that might offset their foreign exchange risks.

However, some counter-intuitive data came out of the depth of deep uncertainties.

Apparel exports, having a double digit decline in September, posted a surprising 3.27% growth in October while overall national export dropped by 7.85%.

Also leather and leather products exports saw a 7.41% year-on-year growth in October. However, the biggest concern for exporters is they are barely managing to negotiate  for higher prices against their rising costs amid order cuts and a risk of slowdown, said Dr Reaz.

Like others, he is also cautious about the export figures in the coming months as Europe shows no sign of improvement. The US economy's monthly rebound on the other hand is good news, he said. 

What is coming?

The worsening situation seems to continue hurting corporate earnings more in the July-September quarter as observed till date. 

Saving their April-June quarter with more or less profits, white goods giant Singer Bangladesh and footwear multinational Bata Shoes nosedived into losses in the July-September quarter.

Less than one-third of the listed firms, mostly from the financial sector and multinational ones with maximum strength to weather bad days, have disclosed their earnings till September and it shows a fifty-fifty ratio of profitability advance-decline.

It is unlikely that overall corporate earnings will improve in the July-September quarter as the business environment only worsened over the three months, said economist M Masrur Reaz.

Freight costs and global prices of some raw materials slightly eased in the July-September quarter, while energy crisis, exchange rate shocks and demand slowdown amid high inflation – all intensified in the period, he said.

Echoing others, he said the lowered consumption of electricity in the winter might help the economy to some extent. But come summer, the same crisis would return.

He cannot foresee any significant cooling down of the global energy and other commodities markets before June next year.

By then, the local currency might further depreciate by 3-4% as export earnings and remittances both are under stress, he said, adding that the export market, especially in Europe, shows no sign of improvement soon.

"What else do you need for a perfect storm?" said Nasim Manzur.

"All our efforts were concentrated on how to best recover from the pandemic shocks and we had been growing more or less until the Ukraine war started brewing the perfect storm for the economy," he said.

In 2020, nearly three-fourths of the listed companies suffered earnings drop, and on their ways to recovery in 2021 around 60% firms saw profitability improvement that surged to over 65% till March this year, said equity analyst Rehan Kabir, a senior researcher at EBL Securities, adding that the trend again heads downward.

Nasim Manzur said the perfect storm is here already and cost savings at every point can help, while the government, for the sake of the repetition of the economy's resilience, should come up with strict measures that would ensure uninterrupted energy and power at factories, reduce businesses' cost burdens and strengthen a good governance drive at all level.

"Idle capacity has a huge cost," said the entrepreneur.