Corporate profitability in the Sultanate plummeted around 20 per cent overall in 2017 versus corresponding figures for 2016, as company bottom-lines were squeezed by, among other factors, higher corporate income tax and the rollback of subsidy on fuel, according to a well-known investment expert.
Lo’ai Badie Bataineh (pictured), CEO of U Capital, a leading Omani asset management and investment firm, noted that fuel price deregulation has had a particular impact on companies dependent on petroleum fuels for revenue generation. On the other hand, higher corporate tax, presently applied at the rate of 15 per cent versus 12 per cent previously, has impacted every company equally.
Also hurting profitability was the introduction early last year of Cost Reflective Tariffs (CRT) for major industrial and commercial consumers of electricity. The move effectively did away with the substantial subsidy that the government makes available on electricity consumption in the Sultanate — a gesture that continues to be enjoyed by residential customers, as well as a wide range of industrial and commercial businesses that consume less than the 150 MW-hours per annum threshold.
“Generally, all industrial companies will get affected by such price hikes due to energy being an important raw material, so to speak, in their cost of goods sold. Companies which are heavily reliant on energy sources are bound to get affected by electricity tariff increases, feedstock gas price hike, and so on, examples being Al Anwar Ceramic Tiles, Al Maha Ceramics, cement manufacturers, and so on,” said Bataineh.
“On the other hand, companies such as financial sector firms, like banks, for example, will not be affected as such, as electricity costs form a small portion of the banks’ overall costs. However, higher tax affects all companies.”
In comments to the Observer, the investment professional outlined a number of steps that companies could consider to alleviate the impact of these tariff increases on their profitability.
“Diversification of the revenue into new segments with lesser fuel consumption would be one of the options to consider,” said Bataineh. “Companies can also bring in efficiencies in plants, thereby reducing fuel consumption without reducing production. On the other hand, output can be increased as well. Also, many companies globally are moving towards solar energy which saves them a lot in terms of cost in the long run.”
On the other hand, Value Added Tax (VAT), which is due to come into effect early in 2019, is unlikely to add any direct burden on the fiscals of listed companies, he pointed out.
“VAT will be a pass-on item for most of the companies and the eventual hit will be on the consumers. However, with the introduction of VAT, the consumption power of the population would decline and hence it will affect the turnover of the companies in terms of volume, which will squeeze the margins and hence the profitability,” he explained.