Deterioration in interest rate and exchange rate projections diminishes the importance of first-quarter figures, shifting focus to executives’ forecasts

04/25/2024

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Jennie Li — Foto: Ana Paula Paiva/Valor

The first-quarter earnings season for Brazilian companies, which picked up steam this week, is set to reveal a snapshot of a scenario that for many firms is already in the rearview mirror. Analysts say that worsening projections for both the global and Brazilian economies have dimmed the allure of these numbers, elevating the importance of executives’ assessments and projections during earnings calls.

Overall, expectations are that the figures for the first three months of the year will continue the trend of sequential improvement over fourth-quarter results, especially for companies operating in the domestic market. For commodity exporters, the impact of falling input prices is expected to be felt.

“In the first quarter, we saw a revision in profit estimates, supported by the prospect of falling interest rates and the positive results companies reported in the fourth quarter, but this changed dramatically in the early weeks of April,” Jennie Li, a strategist at XP, told Valor.

She said that since August last year, market consensus on profits had been revised upwards by nearly 10%. However, with the intensification of uncertainties this April, there has been a decrease of about 1% in these analyst estimates.

“We expect that the resumption of activity, real wage gains, and employment should have positive effects mainly on the results of consumer sectors,” said Carlos Eduardo Sequeira, head of research at BTG Pactual. “It won’t be a spectacularly stronger season, but the trend should continue.”

Consumer companies are expected to stand out, with improvements in operational data and margins. However, Santander noted in a report that changes in the tax regime, with the implementation of tax changes on subsidies, are expected to impact the profit generation of a large part of the companies.

Passed last year, Law 1479/2023 increases government revenue by establishing criteria for deducting the value of benefits from the ICMS sales tax base of federal taxes. Only the value of incentives used in investments can be deducted.

The intense heatwave that hit Brazil in the early months of the year, due to the effects of El Niño, is expected to positively impact the results of power distribution companies and water utilities. Increased volumes of electricity and water are expected to improve these companies’ figures, said J.P. Morgan.

Among commodity producers, those in the paper and pulp industry are expected to be the positive highlights. “We saw a substantial rise in prices that should generate more robust results, especially for Suzano, which deals directly with the commodity,” Ms. Li stated.

Oil companies should also post strong figures, with Petrobras being a highlight, even with falling oil prices, due to high production volumes in Brazil. The outlook is also positive with the recent acceleration in oil prices, the XP strategist said.

Mining companies and steelmakers are still expected to face pressured results, with the sharp fall in iron ore prices in the first quarter impacting these companies’ figures. Mining giant Vale announced its results on Wednesday night, with a 9% drop in profit to $1.68 billion. The steel industry scenario, especially in Brazil, is still challenging and is expected to keep these companies’ performances weak, said BTG.

In this context, due to the significant shift in perspectives we have seen in recent weeks, more important than the results themselves, what the companies indicate for the coming months will be crucial for investors to have better visibility of outcomes.

The exchange rate rose to near R$5.3 per dollar in the first weeks of April. The interest rate curve steepened, largely due to uncertainties involving the evolution of inflation in the United States and the Brazilian government’s indication that the zero-deficit target has been postponed to 2025.

Steelmaker Usiminas, which released its results on Tuesday morning, showed more conservative prospects for the second quarter, noting that the stronger dollar has an impact on the price of steel plate acquisitions, directly affecting its profitability. The steelmaker ended the day down 13.91% in the stock market.

“In the United States, market consensus adjusts faster than here, so after listening to what the companies said during the earnings season, there may be a greater revision,” said Ms. Li.

*Por Felipe Laurence — São Paulo

Source: Valor International

https://valorinternational.globo.com/