Colombo Stock Exchange-listed companies reported a 65.5% year-on-year increase in cumulative earnings, reaching Rs131 billion in the September 2024 quarter, according to an investment report from First Capital Research, despite the benchmark All Share Price Index declining.

The report highlighted that a one-off gain from an acquisition, where the fair value exceeded the purchase price, significantly boosted earnings for Brown & Company, Browns Investments, and LOLC Holdings.

Normalized quarterly earnings, excluding the one-off gain, declined by 16% year-over-year but increased by 121% quarter-over-quarter. When adjusted for non-recurring items, normalized earnings grew by 12.2% compared to the June 2024 quarter, reflecting underlying growth across several sectors while accounting for extraordinary factors.

The Food, Beverage, and Tobacco segment was the primary driver of market earnings in the quarter, recording a 105% increase driven by higher revenue, reduced finance costs, and stable consumer demand. The Capital Goods sector reported a 540% increase in earnings, supported by lower costs, reduced business losses, and gains from acquisitions, with Browns Investments playing a key role.

The banking sector recorded an 11% earnings growth to Rs38 billion during the quarter. The Food, Beverage, and Tobacco sector outperformed, contributing Rs79.5 billion, with Browns Investments’ gains on acquisitions and divestments driving this performance. Melstacorp’s growth, attributed to higher operating income and lower finance costs, also supported the sector’s overall results.

The Energy sector experienced a 68.5% decline in profits due to reduced margins, price adjustments, and currency fluctuations. Laugfs Gas and Lanka IOC reported lower earnings. Laugfs faced increased finance costs and foreign exchange losses, and Lanka IOC’s performance was affected by mandated fuel price cuts and higher distribution costs.

The Consumer Durables and Apparel sector saw a 50% drop in earnings as operating costs and currency volatility offset revenue growth. Declines in gross profit and fair value of financial assets impacted companies such as Ambeon Holdings and Ambeon Capital, further reducing profitability amid geopolitical uncertainties.

Capital Goods’ performance got a boost from Brown & Company, which achieved a 1,020.5% revenue increase due to higher gross profits, reduced administrative expenses, and gains from acquisitions. Additional contributions came from Colombo Dockyard and Softlogic Holdings, which reduced their losses year-over-year, improving the segment’s overall position.

The Energy sector’s contraction reflected broader market challenges, including declining global oil prices and rising renewable energy generation. Laugfs Gas’ earnings fell by 163%, while Lanka IOC’s margins narrowed due to price adjustments. The 2030 renewable energy goals and related policy changes further shaped the sector’s performance.

Consumer Services reported a 43% increase in losses year-over-year, while the Commercial and Professional Services segment shifted from a Rs76 million profit to a Rs222 million loss. The Software Services sector’s losses deepened by 766%, reaching Rs129 million, reflecting challenges related to costs and demand.

Despite the one-off gains, equities are trading at a discount. During the September 2024 quarter, the Colombo Stock Exchange’s All Share Price Index (ASPI) declined from over 12,000 points to 11,864 points despite the subsequent recovery. The index surpassed 16,000 points in January 2025, indicating improved market sentiment following the reporting period.

In a recent roundtable with Echelon, Bimanee Meepagala, Director and Chief Executive of CT CLSA, Asanka Herath, Head of Equities of Lynear Wealth Management, and Udeeshan Jonas, Chief Strategist of CAL, said equities hold promise for 2025.

Herath highlighted that a select group of stocks could deliver 50-60% returns over the next 12 months, driven by valuation re-ratings and corporate earnings growth. He remarked that this optimism is grounded in fundamentals rather than speculation, suggesting a strong market run.

Jonas stated that macroeconomic stability and near-single-digit interest rates could help maintain an equity market multiple of 12.5 to 13 times. He advised investors to align their portfolios with GDP growth to capture positive long-term returns, reinforcing the case for equities as a robust asset class for 2025.

Meepagala noted that the base for 2025 will be strong fiscal policies and stable macro fundamentals supported by political stability. Growth will stem from controlled measures rather than temporary consumption boosts, with positivity expected to carry into 2025. Investors are likely to assign a premium due to this macroeconomic strength. She added that the upcoming budget, scheduled for February 17, will be a critical milestone for shaping long-term policy and driving investor confidence. Fixed-income rates may decline in the short term but rise later as growth picks up, signalling a strong year for equities.