Corporate profits rise highest in Q4 FY11

KARACHI: Corporate profits in fourth quarter (Q4) of the fiscal year 2011 soared by 26 percent year-on-year (YoY), the highest in any quarter in FY11.

The growth was led by the banking sector and the cement & fertilizer manufacturers – taking corporate earnings growth for FY11 to 18 percent. Interestingly, Q4 has contributed most to both FY10 & FY11 earnings, with the least coming from Q1. However, market response to this impressive growth in corporate earnings remained muted, with the KSE-100 falling by 9 percent (despite 40 percent of the companies reporting higher than expected earnings) since the start of the corporate result season (July 25th).

Going forward, analysts expect the positive momentum in earnings to withstand in FY12, with an expectation of a broad based rise of 15 percent YoY. This translates into an impressive earnings yield of 17 percent, offering a positive spread of 360bps over 6 month t-bills & 480 bps over inflation.

While maintaining a positive bias towards POL, PPL, PSO, ENGRO, LUCK & NBP; analyst highlight defensive plays such as HUBCO, FFC & FFBL for gaining ideal exposure at the KSE amid concerns over global eco.

According to analyst selected companies, corporate earnings in Q4FY11 were recorded at Rs 72.1 billion ($845 million) versus Rs 57.4 billion ($679 million) in Q4FY10, up 26 percent YoY. Barring one timers such as retrospective downward revision in revenues of Rs 15.3 billion for OGDC (in 4QFY10) & a deferred tax asset (DTA) write off of Rs 2.6 billion for PSO (Q4FY10), earnings growth would have settled at 37 percent YoY.

While weak domestic demand and energy shortages led to drop in volumes for the manufacturing concerns in Q4, profits soared for the cement (+1054 percent YoY), fertilizer (+54 percent YoY) and the textile sector (+23 percent YoY) owing to margin expansion amid higher product prices.

The energy companies posted below than average growth of 14 percent YoY in their profits during Q4 owing to a one-time downward revision in revenues of Rs 15.3 billion for OGDC. Excluding this & a DTA write off for PSO, earnings for this sector would have risen by 37 percent YoY led by growth in production volumes for E&Ps, higher average Arab light crude oil prices and improved GRMs of the refiners.

The growth in services sector (+45 percent YoY) was primarily on account of improved banking sector profits (+43 percent YoY) amid higher net interest income (spreads up 23bps YoY) and non-interest income. PTCL also recorded an impressive growth of 71 percent YoY owing to higher other operating income.

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