Corporate profitability goes down the drain after 2006

KARACHI: Corporate profitability has declined dramatically since 2006. After tax, profits for the companies listed on the Karachi Stock Exchange have shrunk 77 per cent between 2006 and 2009, said the Economic Survey 2009-10 released on Friday.

In comparison to 2008, company profits after tax declined 67 per cent in 2009, reflecting the impact of a difficult operating environment.

An unstable law and order situation in the country, a crisis in balance of payments, the resulting depreciation of the rupee of over 20 per cent and the energy crisis have all combined to slash profits.

According to the survey, the energy sector, otherwise, one of the most profitable sectors, has been hit hard by inter-corporate circular debt issues.

The subdued investment response since 2008 can be explained by the sharp contraction of listed company profits over the past few years; as corporate profitability has a large bearing on future investment decisions. Profitability was concentrated in a few large companies in the energy, telecommunication and banking sectors.

The Karachi stock market witnessed a recovery phase from July 2009 to March 2010, according to the survey.

The benchmark KSE-100 index rose 33 per cent during the year, in line with the broad recovery of global equity markets.

The market’s low in 2008 was prompted by the imposition of a ‘floor’; the maximum percentage a stock could fall in one day. From that point it has gone up by 107 per cent.

The recovery has mainly been due to an influx of foreign portfolio investment from July 2009 to March 2010. Inflows crossed $440 million at their peak, and have fuelled the index’s recovery according to data released by the Finance Ministry. Volumes traded remained a fraction of those witnessed in 2008.

The main reason of liquidity being unavailable in the market is the absence of leveraged products, according to the government’s economic survey 2009 to 2010.

Published in the Express Tribune, June  5^th, 2010.