Interest rates key to profits

The corporate results season is on and what better time when we move into a 3-6 month period of uncertainty. Yet, as one wag, said Sri Lanka’s corporate sector is resilient and come-what-may, the good companies will do well while the ‘bad’ ones will have all kinds of excuses vis-à-vis the war.

From the results that we find so far – around 20-30 companies – for the third quarter to December, it’s a mixed bag; some good, some not so good. With interest rates (Treasury bills) up at 19 percent now against 13.8 percent in this same period last year, companies dealing with land and property, for example, will find it a tough call particularly if the public is asked to pay such high rates for lease or purchase deals.

Companies with plantations interests overseas like the Carsons Group, in palm oil in Malaysia and Indonesia, are doing well as palm oil prices are soaring. So is rubber. In fact some reports indicate that plantations like Namunukula are expected to show a bigger return from palm oil than tea. Other estates with palm oil plantations like Watawala, Elpitiya and Agalawatte are also reaping the benefits. It’s interesting to see what the rubber lobby – which opposed the entry of palm oil as plantations were transforming then, uneconomic rubber into palm oil – would be saying now that oil is also a profitable crop. In fact both – rubber and palm oil – are fetching good prices.

Among the conglomerates, John Keells Holdings (JKH) and Hemas Holdings have shown profits while Hayleys says restructuring in some sectors have caused losses. Analysts also say in the case of JKH the profits came from interest income while pointing out that the group has reported losses in the lucrative Maldivian hotels sectors due to a refurbishing programme.

What however amazed many analysts are profits at Ceylon Tobacco Co, despite the product being negative in the eyes of society and without recourse to any advertising and promotion. “CTC had an outstanding quarter” was how one broker described the company quarter. “Could it be that every time a price increase is enforced based on an increase in government taxes, the company also gets something out of it?” he asked. F&B major Ceylon Cold Stores showed good returns in the supermarket business as against lower performance in terms of results in the manufacturing area (ice cream, beverages).

Motor vehicle firms are also feeling the pitch in terms of interest rates while a stronger rupee could be beneficial to buyers. United Motors says profits were up but also hindered by interest rates, import levies and other costs.

On the other hand, most companies with reasonably good results are the first ones to release them while the ‘not-so-good’ ones will hold on till sometime in February when the deadline for reporting quarterly results ends. So expect a flurry of results next week and the week after, with a possibly-not-so-bright picture.

How about the banks? Financial institutions have done well in any situation, any crisis – even during 2001 when Sri Lanka recorded its first negative growth due to a major economic and political crisis precipitated by the devastating attack on the Katunayake airport which hurt most companies. Banks are showing results and why not when spreads are said to be much higher than in the rest of the region!

The picture ahead of us – in the next three to 6 months – is murky and uncertain. No one really knows whether the ongoing battles with the LTTE will develop into a full scale operation like in the 1980s and mid 1990s, or will it be a step-by-step approach. And how would that impact on the economy and consumerism? Most companies agree that if at all there is an impact – in the next six months - it would be essentially in high interest rates and a gaining rupee that would hurt export companies, their eternal complaint.

If the rupee continues to gain or hold at these levels banks may also have to take stock of foreign exchange positions which might take a hit from such gains by the rupee.