Firms struggle to sustain profitability amid demand slump, high interest

Businesses registered a strong profitability recovery until June this year after two turbulent years marking the Ukraine war, but a decline by roughly 18% from the previous quarter has blurred their future outlook amid a slump in demand and a jump in interest rates.

Investors are now focusing more on loss prevention rather than growth or expansion.

In the eventful July-September quarter, firms listed on bourses saw their collective profit drop by more than 3% compared to the equivalent period last year, according to data compiled by Sandhani Asset Management.

The banking sector led the decline, with profits falling 45% compared to a year ago.

This decline followed an impressive 26% profit growth posted by over 300 listed firms in FY24, recovering from a 34% drop in the previous two fiscal years when companies were struggling due to a dollar shock and rising commodity prices.

Businesses are now worried about FY25 due to persistent inflation, a slump in demand, high borrowing costs, and the unfolding banking crisis.

Industry reports reveal that every sector, from construction materials to consumer durables and even fast-moving consumer goods, is facing a weakening of demand as consumers, businesses, and the government simultaneously embrace austerity.

"Every industry is facing a slowdown, raising concerns about capacity and debt servicing," Aameir Alihussain, managing director of the country's largest steel producer BSRM, told The Business Standard.

He estimates that demand for steel in November was 30% lower than the same period last year, and the winter season continues with at least 20% lower demand amid weaker private spending on construction, while government sector demand has almost eroded.

"If the slowdown persists, more businesses will face financial strain, which could lead to an increase in bad loans at banks," he added.

Ashraf Ahmed, president of the Dhaka Chamber of Commerce and Industry, said the breathing room businesses experienced in the past fiscal year was mainly due to a reduction in foreign exchange losses, but this comfort is unlikely to last in FY25.

The central bank's inflation-taming measures have pushed borrowing rates to around 15%, up from 9% three years ago, which has become a nightmare for leveraged companies, said Humayun Rashid, president of the International Business Forum of Bangladesh (IBFB).

The local currency resumed its depreciation against the dollar in August, bringing back currency concerns after a brief pause.

Sazedul Kabir, finance controller of Walton Hi-Tech Industries, told TBS that his company spent Tk120-122 per dollar last week, up from around Tk110 a year ago and from Tk117-118 in June this year.

"A further depreciation of the taka will force companies to increase prices again as they cannot afford further losses like those experienced in 2022 and 2023," he added. "A fresh round of price hikes could lead to a further slowdown in demand."

The short-lived breathing space

According to Chartered Accountant Md Selim Reza, chief financial officer of Premier Cement Mills, unlike the two turbulent years, companies had breathing room in FY24 due to better availability, predictability, and stability of the dollar, while forward contracts for dollars also provided firms with a moderate shield against currency risk.

The major raw materials' international price correction from the 2022 peaks also helped improve factory-level profits in the past fiscal year, while many companies moved away from a low-pricing-based growth strategy.

BSRM's Aameir Alihussain said most companies shifted their focus to loss prevention rather than business growth in a slowing economy.

"Most managed to pass their higher costs to buyers as customers had to accept the higher prices over time," he said.

BSRM Steels, on its way to profitability recovery, posted a 13% yearly growth in factory-level profit and a 27% growth in net profits despite a 3.8% slump in revenue in FY24, while higher sales had dragged its profitability the previous year.

"After two bad years, there was little room for further worsening, and the FY24 bounce back was the result of all-out efforts for survival," said IBFB President Humayun Rashid.

"But we are worried about the coming months due to the ongoing challenges," he added.

Bangladesh has seen export growth in recent months, which is a good sign, but global economic uncertainties remain, he added.

"Political stability, law and order, tolerable rates, and ease of doing business are the most important factors businesses need on a priority basis to continue and grow."

Mir Ariful Islam, managing director of Sandhani Asset Management, noted that the Tk23,300 crore collective profit of listed firms in FY24 was still 17% down from their 2021 peak, as neither low interest rates nor post-lockdown demand spikes exist now.

"If quarterly profits do not improve, FY25 might end with a double-digit drop in corporate earnings," he feared, based on the annualised figures of the quarterly profits.

The varied profitability

According to EBL Securities Senior Officer AKM Arif Uzzaman, "Around three-fourths of the listed firms have been posting positive earnings, while the loss-making one-fourth dragged the aggregated profit down."

Until June, the financial sector was the major contributor to the collective profit recovery, he said, adding that after June, the lenders dragged the total down drastically.

In the July 23-June 24 period, financial firms, including banks, non-bank financial institutions (NBFIs), and insurers, together posted a 73% profit hike, following a 50% drop in the previous fiscal year.

Mir Ariful Islam said insurance companies showed steady earnings due to higher returns from their cash pile, while the non-bank financial sector is in its sixth consecutive losing year as the continuous losses of the weaker firms outsize the profits of stronger ones.

The troubled lenders are taking significant losses through provisioning against their bad loans, while the well-governed lenders are experiencing decent profit growth.

With market-based lending borrowing rates in play, banks and non-bank financial institutions saw better profitability, while the higher yields from government Treasury bills and bonds helped cash-surplus lenders earn more, said Md Shaheen Iqbal, deputy managing director of Brac Bank.

However, in the changed regulatory environment, banks opted to address bad assets and set aside more provisions, which dragged down their disclosed profits in the July-September quarter, he added.

According to Royal Capital Head of Research Akramul Alam, the 13 multinationals, as usual, managed their profitability well for years due to their stronger market position and balance sheets.

When homegrown non-financial companies' profits drastically fell by 36% in FY23 before growing by 19% again, the multinationals still managed decent, steady profit growth.

Even in the turbulent July-September quarter, multinationals posted a 33% year-on-year profit growth, while homegrown non-financial companies barely saw any growth.

Chartered Accountant Masud Khan, director of several multinationals, including Unilever Consumer Care and British American Tobacco, told TBS that cash position and debt level are the major differentiating factors now.

"All companies are fighting the slowdown," he said. "Multinationals, usually having surplus cash, are earning higher interest, while the high interest has become a curse for leveraged companies, and the majority of local companies depend on loans for business expansion."

How companies tackle the crisis

Cost control, looking for cheaper sources of funds, and securing enough foreign currency at a good rate are what companies have been desperately trying to save their accounts, said entrepreneur Azam J Chowdhury, managing director of MJL Bangladesh, which leads the country's lubricant and LPG market.

"MJL has been trying to increase foreign currency income by adding oceangoing vessels to its fleet. It also negotiated with foreign trade partners for a longer period to settle its foreign currency payments," he said. "It paid off."

Unlike most local firms, the company posted its highest-ever July-September profit this year, thanks to its strong market position.

Berger Paints Bangladesh, to combat the currency crisis, secured a $60 million foreign currency loan from its parent company abroad in June last year, which is helping its financials.

Despite sales drops, Horlicks seller Unilever Consumer Care posted some profit growth until June this year, thanks to its operating cost cuts and higher interest income from surplus cash.

In the July-September period, a one-fourth drop in sales left no room for the company to retain profits.

Not all firms have ways to secure cheaper loans or foreign currencies, said Walton's Sazedul Kabir.

"July-September was an unusual context as many business days were lost due to political unrest," said Masud Khan. "However, we see little improvement in demand till now, and this may continue until June."  

The technique of loss prevention at the expense of sales growth does not help for long, said BSRM's Aameir Alihussain.

"The cost of idle capacity is too high in a rising interest environment that threatens job creation," he said. "The government should also look at the pace of the economy alongside inflation control."