Overall figures were not disappointing, but slowdown and interest rates are a concern

11/23/2022

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Emy Shayo Cherman — Foto: Ana Paula Paiva/Valor

Brazilian public companies reported good results in the third quarter, supported by the country’s better-than-expected economic activity in the period. However, the persistence of inflation and uncertainty about the interest rates are raising the risk of deceleration in the following months.

According to an analysis carried out by Valor Data with 408 public non-financial companies, excluding the effects of Petrobras and Vale to avoid distorting the sample, net profit fell by 31% year-over-year and increased 15% over the second quarter. Revenues advanced 15% in one year, to R$931.2 billion, and grew 5% over June.

Production costs, although lower when compared to the second quarter – with the reflection of the invasion of Ukraine by Russia – are still at high levels. The 21% increase was greater than the advance in revenue and ate into profits.

“Overall, our perception of the results was positive, better than expected,” said Emy Shayo Cherman, Latin America and Brazil equity strategist at J.P. Morgan. She said the market had low expectations, but GDP growth projected for the third quarter, compared with initial estimates of contraction, helped results to overcome projections.

The main positive highlights were the oil and gas and pulp and paper sectors. “Petrobras reported revenues above the consensus, even with Brent prices below the previous quarter,” said Victor Penna, manager of the market analysis team at BB Investimentos. For him, the sector will be strong in the fourth quarter, since demand and supply remain tight, which would be enough to hold oil prices up.

The market now monitors the controversy surrounding the payment of dividends by Petrobras. In the earnings conference call, the chief financial and investor relations officer, Rodrigo Araújo Alves, said the company’s cash is close to the optimal point of $8 billion and that debt is “stable, controlled” around $65 billion.

Most sectors posted mixed results in the third quarter, said XP’s strategist Jennie Li. “We didn’t see any where all companies had positive or negative results, it depended a lot on the circumstances they were in.”

Construction companies reported results above the expected by the market, while the greater devaluation of iron ore and steel, driven by China, pressured the results of Vale and steelmakers.

Ms. Shayo, with J.P. Morgan, noted that the improved activity of the Brazilian economy impacted mainly services, with disappointing consumer spending figures, as shown by the results of retailers. “Expectations were unrealistic and there was an overestimation by the market.” She recalled that discretionary consumption was especially impacted by the corrosion of the population’s income.

The higher interest rates, still with virtually no effect on the overall sample, have done considerable damage to the balance sheets of consumer companies, as evidenced by the comments of executives and the alarming numbers on the bottom line – the rise in interest rates increases the cost of debt, which is higher because companies have capitalized in recent years.

But that’s not all. The deleterious effect of interest rates also appears in sales. The high default rate has hurt the results of retailers such as Americanas, Magazine Luiza, and Via. The chief financial and investor relations officer of Magazine Luiza, Roberto Bellissimo, said in the earnings conference call that the company is issuing fewer cards as a way to face this situation.

The worsening of the financial result of Americanas, which was negative by R$612.3 million, more than doubled compared to the negative result of the third quarter 2021. The company links the bad figures to the high interest rates in the period, which led to the net loss of R$211.5 million, and to the 19.6% drop in sales of electronics, because they are products of higher average ticket that depend on credit.

In the case of Grupo Pão de Açúcar (GPA), many stores managed to partially pass on inflation to prices, but in regions where competition is fiercer, especially with the Extra brand in the suburbs of São Paulo and Rio de Janeiro, this is harder to do, CEO Marcelo Pimentel told analysts in the earnings conference call. The investments related to the quality of fruits and vegetables had an initial impact, but the group could not pass on direct inflation to these prices.

“If fiscal and political uncertainties remain in place, the Central Bank may have to raise interest rates again, which will put further pressure on companies’ bottom lines,” said Ms. Li. She notes that large publicly traded companies still have ways to protect margins by being more resilient, which reduces liquidity risks.

“This increase [in financial costs] is problematic for the company when it is not capitalized and is burning cash,” said Victor Natal, Itaú BBA’s strategist for individual clients. He points out that it is natural for companies’ financial expenses to increase and that they are used to this amid Brazil’s history of high interest rates. “I believe we have already been through the worst in relation to this,” he said.

For the fourth quarter, the banks believe there will be a slowdown, even with the period being the best for consumer companies, which usually rely on Black Friday and the holiday season. “Sales are likely to increase compared to the third quarter, but they will still be weak year-over-year,” said Mr. Natal, with Itaú BBA.

In the view of Mr. Penna, with BB Investimentos, the atypical fourth quarter, with the FIFA World Cup, is likely to boost consumption figures, especially of beverages. “Ambev may benefit in the ‘away-from-home’ segment, with increased consumption in bars and restaurants,” he said. “The purchasing power of consumers is a point to keep an eye on.”

*By Felipe Laurence, Victoria Netto — São Paulo

Source: Valor International

https://valorinternational.globo.com/