Manufacturers suffer N90bn loss on high borrowing cost

Four out of 11 manufacturers reported losses last year as their borrowing costs surged on the back of rising interest rates and naira devaluation, according to data compiled by BusinessDay.

Analysis of the financial statements of International Breweries Plc, Cadbury Nigeria Plc, Morison Industries Plc and Neimeth International Pharmaceuticals Plc show that they posted a combined loss of N89.8 billion in 2023.

In 2022, three of them reported a total profit of N0.72 billion, while International Breweries posted a loss of N21.6 billion.

Fidson Healthcare Plc, May & Baker Plc and GlaxoSmithKline (GSK) Consumer Nigeria Plc recorded a combined after-tax profit of N4.81 billion, down from N6.47 billion. Okomu Oil Palm Plc, BUA Foods Plc and Unilever Nigeria Plc saw their after-tax profits rise 22.5 percent, 22 percent and 10 percent respectively.

Presco Plc posted a profit of N6.9 billion as against an after-tax loss of N2.8 billion in the previous year.

“The movement in interest rates and the devaluation impact are the two major elements that are affecting the cost of securing finance for the firms,” Abiodun Keripe, managing director at Afrinvest Consulting Limited, said.

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He added that the companies’ bottom line will be weaker and margins will become slimmer, thereby affecting their profitability. “Volumes may not rise quite aggressively or revenue may not increase at a faster pace.”

The total finance or borrowing cost of the six companies jumped to N70.1 billion from N12.9 billion. A breakdown shows that Cadbury had the highest of N38.3 billion, followed by International Breweries with N29.5 billion. Fidson had N1.38 billion, May & Baker (N0.37 billion), Neimeth (N0.56 billion) and Morison (N0.02 billion).

Finance costs, also known as the cost of finances, are costs, interests, and other charges involved in the borrowing of money to build or purchase assets.

Analysts say the increase in finance cost is a result of the naira devaluation in June and the rise in the benchmark interest rate, also known as the monetary policy rate, which has been raised by 725 basis points to 18.75 percent since May 2022.

“The huge increase in finance cost is a result of the naira devaluation. Finance cost and local cost of energy, which has increased, have caused the big numbers of losses,” Gabriel Idahosa, president of Lagos Chamber of Commerce and Industry, said.

Other companies like Guinness Nigeria Plc recorded an after-tax loss of N5.23 billion for the six months ended December 2023 for the first time in three years as against a profit of N4.02 billion in the same period of last year.

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PZ Cussons, for the year ended November 2023, also recorded an after-tax loss of N74.1 billion for the first time since 2019, compared to a profit of N7.7 billion in the same period of 2022.

“The rise in finance cost shows that some of the consumer goods firms have foreign currency loans in their books and by the time the naira was devalued, it increased the naira value of those foreign currency debt obligations which led to it widening,” Israel Odubola, a Lagos-based research analyst, said.

He said the firms were badly affected because they had FX exposure.

The Central Bank of Nigeria (CBN) in June merged all segments of the FX market into the Investors and Exporters window and reintroduced the willing buyer, willing seller model.

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The naira has continued to depreciate against the dollar and other major foreign currencies since then.

The currency depreciated from N463.38/$ to N889.86/$ as of December 15. At the parallel market, the naira depreciated to 1,186/$ from 762/$.

The rising cost of energy and FX pushed the country’s inflation rate to 28.90 percent in December, the highest in at least 20 years from 28.20 percent in the previous month, according to the latest inflation report by the National Bureau of Statistics.

Last year, business activities contracted four times than the three times recorded in 2020.

“The Nigerian private sector returned to growth in December, with renewed increases in both output and new orders recorded amid some signs of recovery in demand,” the Purchasing Managers’ Index by Stanbic IBTC Bank said.

It said this was despite continued intense inflationary pressure, with purchase costs and selling prices each rising at sharper rates than in November.

“Meanwhile, business confidence dropped to the joint-lowest in the decade-long survey so far. The reading signalled a solid improvement in the health of the private sector, and one that was the most marked since June.”

Before the NBS adopted a new methodology for labour statistics, unemployment had quadrupled to 33.3 percent as of Q4 2020 from 8.2 percent in Q2 2015. It was put at 4.2 percent for the second quarter of 2023 from 4.1 percent in Q1.

In the second half of 2023, Procter & Gamble, GlaxoSmithKline Consumer Nigeria, Equinor, Sanofi and Bolt Food announced plans to leave the country.

In August, the Manufacturers Association of Nigeria (MAN) said manufacturing activities continued to suffer due to the persisting scarcity of FX and further depreciation of the naira.

“Only 14.7 percent of manufacturers enumerated claimed that the rate at which forex was sourced improved in Q2; 66 percent disagreed while 19.3 percent were not sure if forex sourcing had improved in the quarter under review,” it said.

The association added that the lingering FX scarcity and continuous depreciation of the naira have left manufacturers bleeding and limited their capacity utilisation since the importation of non-locally produced critical input has become a nightmare.

“The government has to address the root cause of this problem by giving priority to manufacturers. Manufacturing is the bedrock of any economy. And if you are failing in that space, you will trigger inflation and unemployment which could result in a decline in revenues,” Segun Ajayi-Kadir, director-general of MAN, said.