Firms grapple with profit erosion for consecutive second year

Over 330 listed firms, struggling to navigate through escalating costs, weakening taka and a slump in demand, saw their net profits decline for the second year in a row, by a massive 25% fall this fiscal year ending in June.

This follows a 9% drop in the preceding year, as reported by various investment firms.

The resilience of 13 multinational corporations and a few local industry leaders, however, prevented a further slump in the collective figures.

These standout performers, supported by their strong market positions and robust managerial and financial capabilities, managed to achieve higher profits, although many struggled to maintain sales volumes.

Homegrown manufacturers and non-financial service providers bore the brunt of the economic downturn, with an increased number of them slipping into losses or grappling with slumps in profit. According to research from merchant bank CAL Investment, profits for these entities plummeted by 35% in the twelve months leading up to June 30 compared to the previous year.

In response to the dim prospects of a swift recovery, homegrown non-financial firms, concluding their fiscal year in June, collectively slashed dividends by 20.4% this year, according to CAL. This cautious financial strategy, described by polymer entrepreneur Riad Mahmud, a former vice president of the Bangladesh Association of Publicly Listed Companies (BAPLC), reflects a conservative approach embraced by companies.

The corporate recovery from the pandemic-induced setbacks has now faced a second consecutive year of impediments since the Ukraine war, notes Rehan Kabir, head of research at brokerage firm EBL Securities.

In June 2022, 53% of listed firms were reporting higher yearly profits, buoyed by the post-Covid economic rebound and pent-up demand. However, the figure fell to 46% this year, though higher than 24% recorded in June 2020 amid pandemic, according to EBL Securities.

A deeper crisis than pandemic

Entrepreneurs are grappling with a heightened sense of helplessness, exacerbated by macroeconomic factors. Syed Nasim Manzur, Vice President of BAPLC and head of the country's leather and leather goods exporters' association said that during the pandemic, businesses benefited from a lack of inflationary pressure, with governments worldwide providing maximum support.

However, the current scenario paints a starkly different picture. Manzur, also the Managing Director of Apex Footwear, a pioneer in the country's footwear exports, noted the adverse trends in exchange rates, inflation, and interest rates now expose Bangladeshi businesses to prolonged challenges as they await economic recovery.

The impact is felt on multiple fronts – consumers, both domestic and international, are reeling under persistent inflation, leading to a slowdown. Western markets, crucial for Bangladeshi goods, witnessed consumers squeezed by years-high inflation last year, with some temporary relief following corrected global energy prices this year.

Despite initial optimism and a resumption of significant orders by brands anticipating a demand recovery, concerns are mounting once again. A fear of stock-lot issues looms large, and shipments are on the decline. This downturn means that not all exporters are realising the anticipated benefits of a surging dollar, as outlined by Manzur.

Chasing the greenback

Premier Cement Mills emerged as a top player in the cement industry in terms of installed capacity following the commencement of its new unit near Dhaka last year.

Dollar price that started to rise from Tk86 in April last year, now officially hit above Tk110.

Foreign exchange losses more than ate away all the benefits of the expansion of Premier Cement, said its managing director Mohammed Amirul Haque and the company posted losses in the last fiscal year.

Ashok Leyland Bus-truck assembler Ifad Autos sold lots of buses for the Southwestern routes connected with the capital by the Padma Bridge last year. During the settlement of the LCs it opened six to seven months earlier, it finds the depreciating Taka already cost it more than what it made by selling vehicles.

Riad Mahmud, managing director of National Polymer, said manufacturing companies had a few better months earlier this year mainly because of a temporary stability in dollar price. As the cost of imports did not abruptly surge then, the pricing of products proved enough to stay afloat.

Now the dollar hits above Tk120 in the forward deals and even higher at the curb market, he said, adding that it indicates the potential direction of the official exchange rate should go higher.

"We decided to add the potential cost of a surging dollar in our cost calculation," he said, expressing his worries about the sales of his products as polymer pipes, doors and household products all are selling less now.

Steel, cement, food, IT, services sectors, leaving behind their tough time earlier, now managed to post higher profits.

Textile, fuel and power, tannery, engineering sectors suffered huge drop in profits as many of the firms posted losses.

State-owned power transmission, distribution companies that have foreign currency loans now see their liability going bigger and they are posting huge losses.

Other firms exposed to dollar liabilities face the same challenges.

Not only the exchange rate, rising interest rates also emerged as a headache for leveraged businesses, while a few cash-rich firms are enjoying higher interest income.

ACI, for instance, is paying more interest than its operating profits. The top tier local conglomerate, having a track record of leveraged expansion into diversified fields and building market leading brands, already is paying more than 2 percentage points of additional interest against its debts, according to its Chief Financial Officer Pradip Kar Chowdhury.

If the government does not rationalize taxes and duties, the crisis would seriously weaken the private sector, he added.

There are independent forecasts that interest rates might surge by further 200-300 basis points over the next two years.

How multinationals and local champions performed well

Multinationals and local champions have strong brands that helped them transfer higher costs on to the buyers, said Mir Ariful Islam, MD and CEO of Sandhani Asset Management.

Also, they have stronger management and financial capabilities to weather tough times, he added.

Multinational firms Singer, British American Tobacco, Linde, Unilever Consumer Care, Reckitt Benckiser, Marico, Heidelberg Cement, LafargeHolcim, Bata Shoe, RAK Ceramics, Grameenphone, Robi Axiata and Berger Paints together posted 8% year on year growth in profits for the twelve months through June.

Local champions Square Pharmaceuticals, Olympic Industries, MJL Bangladesh leading their sectors also saw profit growth.

Berger Paints Bangladesh CFO Sazzad Rahim Chowdhury thanked the foreign currency loan it took from the parent firm that helped it manage the forex crisis better. The cash rich firm using stronger banks for transaction settlements enjoys a better exchange rate for LCs, if compared to the smaller businesses.

Also, Berger leveraged the correction in global commodities prices earlier this year that helped it save on raw material costs, while most small firms struggled to open an LC even.

Longer wait for recovery

The inflationary environment leading to a slowdown is slashing sales of most manufacturers, said Azam J Chowdhury, former president of BAPLC.

His company MJL Bangladesh leading the lubricant and liquefied petroleum gas market managed to post higher profits after the initial crisis a year ago and he thanked the strong brands alongside the foreign currency earnings from shipping business.

But when the adversity might stop is unknown to the entrepreneur leading the associations of the country's ship owners, LPG operators.

Amid a 15% decline in paints consumption, Berger's sales volume dropped 9% in July-September as buyers' priority shifted to more essential products.

Apex's Manzur said consumers' shrinking disposable income and a sense of financial uncertainty have already led to a significant slowdown in consumer discretionary products.

Biscuit market leader Olympic, hair care market leader Marico, health food drink Horlicks maker Unilever Consumer Care, after outperforming in several quarters, are seeing slower sales as soon as the fresh round of currency depreciation started a few months ago.

Not all the surge costs could be passed on to customers, said entrepreneurs and executives adding that there lies the risk of a worse tomorrow for them.

Chartered Financial Analyst Ahmed Omar Siddique, head of investment strategy at CAL Investments said he does not expect a significant improvement in the macroeconomic front in the next six months.