How rate hikes, weaker naira hurt FMCG firms

A combination of rising interest rates and naira devaluation dealt a severe blow to the financials of many fast-moving consumer goods (FMCG) firms as their borrowing costs skyrocketed in the first half of the year.

BusinessDay analysis of the data from their financial statements show that the total finance cost of 10 FMCG firms rose by 469.4 percent to N376.4 billion in H1 2023 from N66.1 billion in the same period of last year.

The firms are Nestle Nigeria, Unilever Nigeria, Cadbury Nigeria, BUA Foods, Nascon Allied Industries, Dangote Sugar Refinery, Nigerian Breweries, Guinness Nigeria, International Breweries and Champion Breweries.

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 as a result of the naira devaluation in June and the rise in the benchmark interest rate, also known as Monetary Policy Rate, which has been raised by 725 basis points to 18.75 percent since May last year.

This puts more pressure on the margins of FMCG companies, already dealing with double-digit inflation rate and weak purchasing power of cash-strapped consumers.

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

He said 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.”

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Israel Odubola, a Lagos-based research economist, said the over fivefold increase in borrowing costs shows that some of the companies had foreign currency-denominated loans in their books and by the time the naira was devalued, it increased the naira value of those debt obligations.

“Finance cost is a deduction in an income statement. So, it will weigh on the profitability, which is what is happening. Most of the companies that are multinationals are badly affected because they had FX exposure. Had it been they took local loans, the increment in finance cost will not be up to that,” he added.

Dangote Sugar, Cadbury, three others post N132bn loss

A breakdown of the data shows that Cadbury Nigeria recorded the biggest increase in finance cost of 22,394.9 percent to N21.8 billion from N96.7 million. Guinness Nigeria saw its finance cost jump by 2,401.9 percent to N53.3 billion from N2.13 billion.

The finance cost of Nestle Nigeria surged by 1,878.2 percent to N137.73 billion. Dangote Sugar’s finance cost rose by 1,140.2 percent to N90.7 billion, while that of Nigerian Breweries increased by 262.5 percent to N11.2 billion.

Others are Unilever Nigeria, whose finance cost grew by 135.6 percent; International Breweries, 127.9 percent; Nascon, 119.4 percent; BUA Foods, 54.0 percent; and Champion Breweries, 12.7 percent.

“Finance cost means that you raise naira to pay for dollars used to import raw materials. The dollar will remain the same but the naira needed to finance it increased. This is why some of them declared heavy losses,” Gabriel Idahosa, deputy president of Lagos Chamber of Commerce and Industry, said.

He added that coupled with the high cost of energy, manufacturers are not having it easy at all.

Further analysis of the companies’ financial statements revealed that five of them – Guinness Nigeria, Dangote Sugar, International Breweries, Nigerian Breweries and Cadbury Nigeria – reported a combined loss of N131.9 billion in H1 2023, compared with a profit of N57.3 billion a year earlier.

“There were challenges faced in sourcing an adequate quantity of foreign currencies from the official markets, resulting in a slowdown of business operations when foreign currencies required to purchase production materials are not available,” Dangote Sugar said in a recent note.

Champion Breweries reported a decline of 3,600.1 percent in profit to N29.1 million. Nascon, BUA Foods, Nestle Nigeria and Unilever Nigeria posted a combined profit of N153.8 billion, up from N70.5 billion.

The biggest problem for a lot of consumer goods firms was the FX losses, according to Ayorinde Akinloye, an investor relations analyst at Seplat Energy Plc.

“Apart from the increase in the cost of energy, which led to higher prices in logistics, the FX pressures have the biggest impact on their performance,” he said.

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

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

The official exchange rate increased from N463.38/$ to N747.76/$ as of Friday. At the parallel market, the naira depreciated to N1,000/$ from 762/$.

The high cost of sourcing FX was one of the major factors that pushed Nigeria’s inflation rate to an 18-year high of 25.80 percent in August from 24.08 percent in July, according to the National Bureau Statistics (NBS).

A recent survey by the Manufacturers Association of Nigeria (MAN) showed that manufacturing activities continued to suffer due to persisting scarcity of forex 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 forex 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 short-term remedy will require managing the floating exchange rate system within an acceptable lower and upper bound, pending the actualisation of a net-exporting economy,” it added.

Higher prices dropped business activities for the third straight month to 50.2 in August, the lowest in five months, from 51.7 in July, according to the latest Purchasing Managers’ Index report by Stanbic IBTC Bank.

The latest aggregate Manufacturers CEO’s Confidence Index of MAN also shows that manufacturers’ confidence in the economy dropped to the lowest in nearly two years in the second quarter.

The index declined for the third straight quarter to 52.7 points in Q2 from 54.1 points in the previous quarter.

The challenging macroeconomic issues impacted on the manufacturing sector as its growth rate slowed to the lowest in three years. According to the NBS, the real GDP growth of the sector stood at 2.2 percent in Q2, the lowest since Q2 2020.

“Manufacturers are procuring forex at a very high cost. They can’t get the quantities or amount of dollars needed to buy raw materials or machines at the official market, so they are forced to the parallel market,” Toye Folosho, an official at MAN, said.

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He recommended the government should do an emergency kind of rescue to address the issue of forex by restructuring the economy.

Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprises, said the CBN should prioritise clearing the backlog of FX obligations.

“The clearance of the backlog of forex obligations should be accorded high priority to restore the confidence of domestic and foreign investors,” he said.

He suggested that in addition to the existing I&E FX window, the central bank should “create an autonomous window in the banking system where the currency can trade freely without any encumbrances.”