51 real sector listed firms on the Nigerian bourse recorded a 43 percent increase in their cumulative profit after tax (PAT) at the end of the first quarter of 2021, but for this increase, the managements of these firms would have been scratching their heads to find lasting solutions to the rising cost of sales and finance costs which reduced their bottom line during the period.
High cost of sales and finance costs have been the bane of manufacturing in Nigeria, but in recent times, a few manufacturers have started to explore different options such as commercial papers with a view to bringing down these costs because it is not in all cases they could transfer the burden effectively to the final consumers, especially if the final goods and services are price elastic.
Cost of sales, otherwise known as the cost of goods sold (COGS), represents the direct costs incurred during the production of goods, and it includes material and labour costs. COGS are subtracted from a company’s turnover or revenue to compute the periodic gross profit. Finance cost on the other hand, comprises interest and other costs that a firm incurs while borrowing funds from financial institutions. The continuous rise of these costs has been of serious concern to players in the real sector of the Nigerian economy.
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A traditional real sector firm is involved in raw materials importation, high diesel consumption and high interest rate payment to financial institutions since almost all their funding is sourced from deposit money banks in the country.
The real sector firms, drawn from agriculture, construction, healthcare, food and beverages, oil and gas, as well as in chemicals and paints sub sectors, incurred N764.31 billion cost of sales at the end of the first quarter of 2021, which was higher than N672.47 billion in Q1 2020 by 14 percent. Further, the combined finance costs of the firms rose by 45 percent to N48.76 billion in Q1 2021 up from N33.34 billion in Q1 2020.
Earlier this year, a survey conducted by BusinessDay showed that over 70 percent of businesses in Nigeria sourced their forex from the parallel market. Even at the official market, the central official exchange rate has moved from N306.5/$ in the first quarter of 2020 to N360/$ in July 2020, then to N379.5/$ between August 2020 and April 2021, until it was recently devalued to N411.20/$ in early May 2021. At the parallel market, the naira has exchanged for between N450/$ to N490/$, with its attendant effect on the cost of sales during the period.
Crude oil prices rose from $7/barrel in April 2020 when most economies were in lockdown to a high of $62/barrel in March this year. The rise in crude oil prices at the international market affected the landing costs of petroleum products in the country, as Nigeria, although the highest crude producing in Africa, this status has no positive impact as every litre of petroleum products consumed is imported. With all these economic factors combined, headline inflation maintained an upward movement from 12.13 percent in January 2020 to 18.17 percent as of March 2021.
“With the volatility in the exchange rate, definitely this will have negative impact on the financial positions of several companies. One of the means to mitigate the volatility is for companies to hedge their risk with instruments such as forward contracts, etc.
“Also, there is need for firms to start looking inwards for the source of their raw materials for those they can source domestically in order to reduce their exposure to the negative volatility in foreign exchange”, Moses Ojo, a Lagos-based economic analyst said.
As these costs have eaten into gross and net profits, firms’ financial positions could have been made much worse save for the increase in their revenues during the period. With a combined turnover of N1.22 trillion, first quarter 2021 rose by 20 percent over N1.02 trillion realised in corresponding period in 2020. In addition, the combined profit after tax (PAT) of the 51 firms which was N168.76 billion in Q1 2021 was higher than N117.88 billion in Q1 2020 by 43 percent.
In percentage terms, the highest increase in turnover and cost of goods sold was in the printing press sub sector, which recorded 111 percent and 109 percent increase in those metrics respectively. Finance cost of this sub sector increased by 52 percent. On the contrary, the PAT of the sector crashed by 147 percent.
“Prices of printing materials have skyrocketed in the last one year. Some materials that we bought for about N10, 000 early last year now go for thrice that price. When you ask distributors, they usually say the cause is the exchange rate”, Olalekan Supo, a printer in Shomolu, Lagos State, said.
Other sectors with higher COGS are the conglomerates which recorded 35 percent increase in COGS; 35 percent each in agriculture, food and beverages, and brewery. In the construction sub sector, the increase was 22 percent during the reference period.
The highest increase in finance cost was in food and beverages with 165 percent rise in COGS, and it was followed by construction with 65 percent rise, while the finance cost of the printing press increased by 52 percent.
