Letter IEDI n. 877–Obstacles to restoring corporate profitability
After two years of recession, expectations of a consistent economic activity recovery continue to be frustrated. In March, the prospect of GDP growth for 2018 was 2.9% (Focus survey). This market projection fell to 1.4% in September. Since the end of 2017, GDP growth rates (in relation to equivalent periods of the previous year) show the intensity of the deceleration: from a 2.1% expansion in the 4th quarter of 2017 to rises of 1.3% and 1.0% in the first two quarters of 2018, respectively.
This loss of strength had significant adverse effects on the profitability of non-financial corporations in the first half of 2018, as analyzed in this Letter IEDI from the accounting data of 322 publicly held non-financial companies representing the main sectors of the economy —industry, commerce and services.
The inconsistency of the economic recovery was not, however, the only factor restricting the improvement of firms' patrimonial conditions. Other weighty factors were the sharp business turmoil resulting from the truck drivers' stoppage at the end of May and the heightened uncertainty regarding the political scenario with the proximity of elections. All these factors contributed to the deterioration of business confidence, which has not been fully restored yet. As if these mishaps were not enough, there was also the Real devaluation inflating debts denominated in foreign currency and increasing prices of imported inputs.
In this context, the financial situation of large companies deteriorated again, mainly due to the performance in Q2/2018. There were higher bank indebtedness, greater ratio of financial expenses to operating profits and reduction of net profit margins. The worsening between 2017 and 2018 was more pronounced in the figures for total industry (Petrobras and Vale excluded): net profit margin fell between the first two halves of these years from 2.9% to 1.7%, the lowest net profitability since 2015.
The second quarter of 2018 explains much of this evolution. The net profit margin for the industrial aggregate (excluding Petrobras and Vale) declined -2.0% versus a positive result of 5.7% in Q1/18. Another dimension of the financial fragility of large industrial companies was the drop in the amount of financial charges that could be covered by operating profit. This indicator had reached 1.7% in the first quarter of 2018. From April to June, this rate fell sharply to 0.61%, which means that the volume of operating profits accounted for only 61% of the financial costs incurred in this period.
Although there was some consistency in the recovery of operating margin (despite the fall in Q2/2018, partly due to the effects of the truck drivers' standstill), financial factors once more contributed to the low profitability of the productive sector, especially the industry's. The 2nd quarter of 2018 registered the most notable increase in these companies' financial expenses: from R$ 6.5 billion (Q1) to R$ 19.7 billion (Q2), as a result of the devaluation of the Real.
Faced with this financial constraint, industrial companies increased their net debt in the first half of the year to 88% of equity, four percentage points above the same period in 2017. In terms of amounts, total bank indebtedness went from R$ 348 billion to R$ 362 billion in the year-to-June of 2017 vs 2018, respectively, for the industry aggregate (excluding Petrobras and Vale).
The deceleration of industrial net and operating profit margins, especially in Q2/2018, has inhibited a more consistent dynamics of productive investment. The CAPEX/depreciation indicator started to recover in Q2/2017, but it evolved little until mid-2018.