Letter IEDI n. 1091—Profitability and corporate debt in the pandemic
This Letter updates the monitoring carried out by the IEDI on the economic and financial performance of publicly traded non-financial companies operating in the country. The balance sheets and income statements of 245 large companies were compiled with information for the years 2016 to 2020, and for the year of the pandemic data were also aggregated quarter by quarter.
For 2020 it was expected GDP would grow above previous years with inflation under control, but the outbreak of the pandemic radically changed the picture. With the onset of COVID-19 in Brazil, in Mar'20, uncertainty reached extremely high levels and measures to contain the health crisis hampered economic activity, negatively impacting the results of large non-financial enterprises.
The intense currency depreciation in the first months of the year, combined with the mismatch between the downward flow of operating revenues and the upward volume of financial expenses (due to high indebtedness) produced large losses in Q1'20. However, in the second half of 2020, there was a general recovery of business profitability and the levels of indebtedness and financial costs fell.
The balance sheets of the companies registered unquestionable progress due to a combination of factors: emergency programs to combat the economic effects of the pandemic, such as assistance paid to families and special corporate credit schemes, maintenance of an environment of low interest rates, progressive loosening of social isolation, cash generation strategies such as the reduction of inventory levels, exchange rate appreciation in the last months of the year and a rise in international commodity prices.
Net profit margins for the group of non-financial companies in the sample ended the year positive at 4.8%. That is, at a lower level than recorded in 2019 (6.0%), but higher than in 2016 and 2017.
In the case of the industry—excluding Petrobras, Vale, Braskem and Suzano, which tend to distort the results of the sample—the 2020 net profit margin was 3.8%, therefore below the figure for the total set of companies. Here, too, performance was weaker than that recorded in 2019 (4.5%), but greater than the margins of 2017 (2.1%) and 2018 (3.3%), that is, after the 2015–2016 crisis.
It is important to note that this evolution was asymmetric across the different industrial sectors, having been driven by activities positively influenced by the rise in commodity prices late in the year, such as mining, steel and wood, which, as well as civil construction and non-metallic minerals, also may have been favored by the revival of the real estate sector. Net margins of machinery and equipment and, to a lesser extent, electronics also reacted well.
Much of the improvement in net margins came from operating profitability, largely helped by the emergency aid paid to families, which represented ten times the yearly value of the Bolsa Família program, equivalent to about 4% of GDP in 2020. In the total sample of companies, the operating margin was 13.6% last year, compared to 12.7% in 2019.
In the industry (excluding Petrobras, Vale, Braskem and Suzano), the operating return rose in the third and fourth quarters, which raised the sector's margin to 9.7% in 2020 from 8.4% in 2019. This preserved the upward trajectory seen in recent years. It is worth remembering that in 2016, the last year of crisis previous to the pandemic, the operating margin of the industry was 5.7%.
Some segments stood out in this upward movement of operating profitability, generally those associated with intermediate goods, such as pulp and paper, steel, oil and gas and chemicals, but also mining, metallurgy, civil construction and electronics. Others like food and drink preserved their margins despite the pandemic.
As for the level of debt, there was a significant increase in 2020, as a result of the companies' need for liquidity in a context of business sluggishness. The total bank debt of the companies in the sample jumped 21.3% compared to 2019, interrupting the process of reduction seen in previous years (-10% between 2016 and 2019). A positive fact is that the weight of short-term debt in the aggregate sample (except Petrobras, Vale, Braskem and Suzano) did not increase, remaining at 25.7% in 2019 and 25.9% in 2020, that is, below the 2016 level (30.1%).
Another favorable aspect is that, since part of the resources leveraged through debt was channeled to strengthen the companies' liquidity, it ended up not compromising their net indebtedness. For the total sample, the ratio between net debt and equity decreased from 57.4% in 2019 to 53.7% in 2020.
For the industry (except Petrobras, Vale, Braskem and Suzano), the trajectory was the same: +26% expansion of total bank debt, with a reduction in the share of short-term debt from 21.5% in 2019 to 20.4% in 2020 (27.4% in 2016), and a decline in the net debt to equity ratio from 64.3% to 57.7% in the same period.
The second half of last year was important for this behavior of corporate debt. Not only business strategies contributed to avoid over-indebtedness in the period, but the exchange rate appreciation also played a role in the final months of the year, favoring the reduction of liabilities denominated in foreign currency. In the case of the industry, the debt stock dropped 10% from the end of the 1st half of 2020 to the end of the 2nd half.
The environment of low interest rates and emergency credit at an even lower cost were another factor that allowed better management of companies' financial expenses. The EBITDA-to-interest coverage ratio was 1.2 in 2020, just below the 2019 level of 1.5 for the sample as a whole.
In the case of the industry (excluding Petrobras, Vale, Braskem and Suzano) these values for the EBTIDA-to-interest coverage ratio were 1.3 in 2020 and 1.4 in 2019. Basic industry firms, extractive companies and agro-industrial enterprises were even able to accumulate significant financial income.