Published on 07:00 AM, January 23, 2024

Corporate profit squeezed by energy cost, currency shock

Bangladesh's economy has been facing tough times of late as sustained high inflation, hike in interest rates and massive devaluation of the local currency continue to plague the country. In this series, we take a look back at how various industries fared amid the crisis in fiscal year 2022-23. Here, in the seventh and last instalment of the series, we placed more than half of the listed firms under the scanner.

The profit of listed companies in Bangladesh dropped 20 percent year-on-year in 2022-23 despite higher sales, owing mainly to the depreciation of the local currency and higher energy costs.

An analysis of the financial reports of 167 companies listed on the Dhaka Stock Exchange showed that their combined sales rose 10.5 percent to Tk 121,132 crore in the last financial year. However, profits dropped 20.8 percent to Tk 8,848 crore.

Multinational companies, banks, non-bank financial institutions, and insurance companies were not included in the analysis of The Daily Star since their financial year ends in December.

Of the 167 firms, 16 slipped to losses, 18 incurred higher losses and 70 logged lower profits in the year that ended on June 30.

"The profit fall is common to all whether they are listed or not," said Rupali Chowdhury, president of the Bangladesh Association of Publicly Listed Companies.

"The main reason is the serious drop in demand amid higher inflation and economic downturn."

In Bangladesh, the Consumer Price Index rose 9.02 percent in 2022-23, the highest in 12 years.

"People are trying to cut expenses which is not good sign in a capitalist economy. The demand for goods in export markets also fell amid persisting global uncertainty."

In the last financial year, all businesses struggled to open letters of credit (LCs) as the central bank moved to limit the outflows of foreign currencies amid a sharp fall in the international currency reserves.

Internationally, raw material prices rose, dealing a blow to the import-dependent nations like Bangladesh.

Between July 2022 and June 2023, the local currency was weakened by 16.12 percent to Tk 109 per US dollar, Bangladesh Bank data showed. It lost its value by about 30 percent in the past two years, making imports costlier.

The cost of energy surged after the government adjusted prices to stop the fall of the reserves and reduce subsidy requirements. Transportation costs also went up.

Electricity tariffs rose by 5 percent three times, resulting in a compound increase of around 15.7 percent. The price of diesel, which makes up 70 percent of all petroleum products consumed in the country, grew 37 percent.

The price of furnace oil, which is used by power plants, surged 41.4 percent. Likewise, the retail price of gas for industries was hiked by 150 to 178 percent in the previous fiscal.

"Businesses faced multiple effects in FY23. In order to absorb higher costs, many companies have raised the prices of their products. But the price adjustment was not enough to ensure a healthy profitability," Chowdhury said.

In FY23, the profit margin of the listed companies dropped to 7 percent from the previous year's 10 percent, the analysis showed. The profit margin, also known as profitability, measures how much net income or profit is generated as a percentage of revenue.

Though the sales growth was seen in FY23, it was value growth driven by higher prices. On the other hand, the volume growth was minimal, added Chowdhury, also the managing director of Berger Paints Bangladesh.

Square Pharmaceuticals posted the highest profit among all the companies, taking home Tk 1,898 crore in FY23. United Power Generation made a profit of Tk 1,333 crore, Beximco Pharmaceuticals Tk 452 crore, Meghna Petroleum Tk 442 crore and Padma Oil Tk 349 crore.

ACI Ltd topped the list of the companies in terms of sales, with its turnover standing at Tk 11,535 crore. BSRM Ltd's sales amounted to Tk 11,506 crore, BSRM Steel Tk 8,452 crore, Beximco Ltd Tk 6,881 crore, Walton Tk 6,637 crore, Square Pharmaceuticals Tk 6,247 crore, and GPH Ispat Tk 5,765 crore.

Mohammad Ali Khokon, president of the Bangladesh Textile Mills Association, said businesses suffered in the last fiscal year as the costs of raw materials and utilities rose.

"Many textile millers had to cut production by 30 percent to 40 percent amid the gas crisis. Similarly, many firms struggled to open LCs."

Because of the spike of the dollar price from Tk 100 to Tk 120, an importer's LC opening limit has been squeezed from $1 to $0.83, said Khokon, explaining the impact.

The demand for goods also reduced in the western markets amid global economic inflationary pressure. Bangladesh's exports grew 6.67 percent year-on-year to $55.55 billion in FY23.

Speaking about the current business scenario, Khokon, also the chairman of Maksons Spinning Mills, said the situation is comparatively better but it has not returned to the pre-crisis level.

Among the sectors, fuel saw the highest profit margin of 33 percent on the back of interest incomes from fixed deposits. Hotels came second with the segment's profitability rising to 27 percent.

Amin Ahmad, chairman of Best Holdings, explains why the hotel segment has fared well.

"We have a minimum raw materials cost. So, the profit margin is higher," he said, adding that labour costs account for a major portion of the expenses.

The profit margin in the food processing, telecom, and IT sectors was 15 percent, 14 percent and 11 percent, respectively. The pharmaceuticals and power sectors witnessed a profit margin of 10 percent and 9.49 percent.

At less than 3 percent, the textile and tannery sector's profit margin was the lowest among the sectors.

The food sector's profitability stood at 15 percent. However, if the share of heavyweight British American Tobacco is excluded, the profit margin of the segment would fall to 3.49 percent.

Ali Imam, managing director of Edge Asset Management Company, blamed the higher freight costs and supply chain disruptions for the spike in expenditures.

"Most of the businesses in Bangladesh are highly leveraged, so a higher interest rate has raised their finance cost."

He said due to the absence of good corporate governance and efficient management, businesses could not find any innovative solution to face the challenging situation.

"Most of the companies could not pass on the cost stemming from an elevated level of raw materials and input costs by raising prices. So, their profits dropped."

According to Ali Imam, companies with good corporate governance, loyal customers, pricing power, low debt and surplus cash will fare well in the coming months and will be well-positioned to clock higher sales and profits.