Today's Letter IEDI carries on with the Institute's periodic monitoring of balance sheets of publicly traded non-financial companies. On this occasion, in addition to performance during the pandemic, profitability and debt indicators up to Q1'23 are analyzed. The emphasis is, as usual, on industrial corporations.

During the COVID-19 pandemic, the set of 230 publicly traded companies analyzed, including industrial firms, increased their levels of debt, seeking to build up net reserves to face the uncertainty of the period and access the resources necessary to fulfill their commitments in a context of social isolation and falling demand. 

In current values, the stock of bank debt of the non-financial companies analyzed jumped 26% in the comparison between 2021 and 2019. In the industry, the increase was of 23%, but if we exclude our large extractive companies, Petrobras and Vale, as well as Braskem and Suzano, the jump in the industry's bank debt reaches 59% in the period.

Throughout the study, we created an index for industrial companies without the four mentioned above, which, due to their size, often distort the sector's data. For this reason, we also analyze the group of all non-financial companies excluding Petrobras, Vale, Braskem and Suzano.

For some firms, the debt increase during the pandemic was also due to the devaluation of the real in relation to the dollar, which raised the share of liabilities denominated in foreign currency. Although not so much for the industry, the 2019–2021 period was also accompanied by an increase in the share of short-term loans, notably for services in 2020 and retail trade until 2021.

The significant expansion of debt levels was not accompanied by a deterioration in corporate equity for some reasons.

Firstly, because interest rates in the country have been drastically reduced, relieving the financial costs of this higher debt. It is worth remembering that the Central Bank kept the Selic rate at only 2% per year between Aug'20 and Mar'21 and that the federal government established programs such as Pronampe and Preac, in addition to reactivating the traditional channels for granting targeted credit.

Second, countercyclical measures to deal with the economic effects of the pandemic, among which the Emergency Aid stands out, enabled a rapid recovery of the economy, despite periods of greater or lesser isolation due to the waves of contagion. This allowed for a reaction of firms' operating revenues.

It should be noted that the global logistical disorganization and the redirection of demand to domestic production favored price increases along many chains, reinforcing the cash flow of companies.

Thus, the indicator of financial expenses over operating revenues, although worse in 2020, improved in the following year, returning to 2019 levels for all the companies analyzed (5%). In the case of the industry, directly affected by the disorganization of production chains, the 2021 indicator was below that of 2019 (5.2% compared to 6.4%, respectively); this was also the case when Petrobras, Vale, Braskem and Suzano were excluded (2.4% against 3.3%).

The 2021 EBITDA/financial expenses indicator reached a level almost twice as high as in 2019 for the group of companies in the sample (3.2% compared to 1.5%), as well as for the industry except for the four large ones identified above (3.2% versus 1.6%). In the case of the industry as a whole, it reached 4% against 1.4%.

Net profit margin, on the other hand, rose from 6.2% to 14.5% between 2019 and 2021 for all companies, in the wake of falling interest rates and the reaction of economic activity. In the industry excluding the big four, it went from 5% to 10%, that is, it rose less than and was below the indicator for the complete set of firms. This difference is mainly due to the large companies linked to commodities, Petrobras, Vale, Braskem and Suzano.

Much of the behavior identified so far was lost and reversed during 2022, leading to a quite different situation in Q1'23.

This is because the underlying factors previously pointed out started to operate in the opposite direction. Interest rates rose significantly to contain inflation, heavily pressured by the increase in international fuel prices due to the war in Ukraine, and the pace of economic activity lost strength, with the exhaustion of the economic measures to fight the COVID-19 crisis.

The base interest rate, Selic, jumped from 4.25% p.a. in mid-2021 to 13.75% p.a. in mid-2022, remaining at this level until very recently (Aug'23). The average interest rate in non-earmarked bank loans to companies reached 21.6% p.a. on average in Q1'23, increasing corporate financial costs.

The performance of Brazilian GDP, as discussed in the IEDI Analysis of June 1st 2023, although a positive surprise, was accompanied by paralysis of the domestic market in Q1'23, following the signs of deceleration of 2022. To this is also added the loss of dynamism of global GDP, as discussed in Letter IEDI n. 1200. 

As a result, for the complete set of companies, net profit margin decreased from 15.6% in Q1'22 to 9.3% in Q1'23 and the EBITDA/financial expenses ratio from 3.9% to 2.2%, while net financial expenses/operating revenue rose from 2% to 5.1%.

The worsening of profitability was driven by two sectors more directly impacted by interest rates: retail firms, which registered a net margin of -0.5% in Q1'23 vis-à-vis 2.3% in Q1'22, and industrial companies, whose margin decreased to 1/3 in the period.

In the industry, the loss was more intense when Petrobras, Vale, Braskem and Suzano were excluded. The net profit margin of the sector as a whole decreased from 19% to 11.3% between Q1'22 and Q1' 23 and, excluding the big four, from 6.7% to 2.1%. This difference reflects the positive impact of the increase in commodity prices on the balance sheets of the aforementioned companies.

As for financial expenses, for all industrial companies in the sample, the EBITDA/financial expenses indicator fell from 7.3% in Q1'22 to 2.9% in Q1'23 and the financial expenses/operating revenue ratio rose from 1.2% to 3.7%, respectively.

In the case of the industry except Petrobras, Vale, Braskem and Suzano, the deterioration is more worrying. The EBITDA/financial expenses ratio, which was equal to 1.8% in Q1'22, decreased to 0.9% in Q1'23, meaning that the operations of industrial firms did not generate sufficient resources to cover their financial expenses. The financial expenses/operating income indicator rose from 2.7% to 3.9% in the period.

The level of debt rose in this context of higher interest rates. For all the companies analyzed, the net debt/equity ratio rose from 62.9% in Q1'22 to 74.3% in Q1'23, reaching 84.4% if the four large companies mentioned above are excluded. The share of short-term debt increased by about 1.5 p.p. for both groups (to 17.1% and 18.6%, respectively), driven mainly by service sector companies.

For industrial companies, the debt expansion was even more pronounced, reaching 87.4% in Q1'23, excluding Petrobras, Vale, Suzano and Braskem, versus 69.2% in Q1'22 and 79.8% in Q1'21. The weight of short-term bank debt, however, changed little between the beginning of 2022 (17.9%) and the beginning of 2023 (17.4%).

The full text is available in Portuguese.