• Friday, March 29, 2024
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Falling headline Inflation masks higher pricing power for NSE 30 firms

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Nigeria’s inflation rate is moderating, but the equities market suggests customers are paying higher prices on consumption.

With the latest data from the National Bureau of Statistics (NBS), showing the nation’s inflation rate slowed year-on-year in February to a 3-month low at 11.31 percent, the country’s Monetary Policy Committee (MPC), other things being equal, might be tempted to ease benchmark rates.
However, data from the equities market suggest a contrary trend in the general price level.
Analysis on the 30 most-capitalized and liquid stocks on the Nigerian Stock Exchange shows that the companies have been able to successfully shift the burden of rising costs and wages through prices to households in 2018 compared to the preceding year.

Gross margins (the percentage of revenue a company keeps after the costs of producing the goods and services they sell) for NSE 30 companies which have released their full-year 2018 financials so far indicate that efficiency for turning revenue into profit among all the 12 companies examined rose year-on-year.

For instance, gross margins of the companies rose to an average of 37.92 percent in 2018 from 37.90 percent in the previous year, while the firms’ average cost of goods sold also increased by 8.50 percent in the review year.

The ability of companies to increase, albeit marginally, their gross margin in spite of increasing wages and expense in the balance sheet is proof of the pricing power of the firms.

With an uptick in inflationary pressures evident in companies’ balance sheets, gross margins are expected to plummet as high cost of production would bite on the top line, while increases in wages and salaries would weigh on the companies’ bottom line except customers are bearing the brunt of pricing power.

This explains why their average revenue jumped 6.54 percent, indicating they shifted the increased costs – which someone has to account for – to their customers.

Out of the twelve NSE 30 companies that have released their 2018 audited financial results as at Friday, only three including tier-one lenders, Guaranty Trust Bank and Zenith Bank, and Nigerian Breweries recorded decreases in the their costs, while other nine (9) companies grew costs in 2018 compared to the previous year.

“Over the period, Nestle reported 11% YoY increase in gross profit while gross margin expanded 156bps YoY to 44%, driven by a slower increase in cost of sales (+4.3% YoY) relative to topline growth,” ARM Research said in a recent note.

Seplat Petroleum Development Company led other companies having grown gross margin to 52.43 percent in 2018 from 46.91 percent with 47.98 percent surge in the cost of goods sold and over 65 percent sales increase, while figures from Nascon Allied Industries’ results show the company was not successful in making the customers pay for its high costs.

Despite 5.38 percent increase in the cost of goods sold to N17.99 billion by the salt refiner, sales plummeted by 4.78 percent to N25.77 billion as against N27.06 billion recorded a year earlier, causing its gross margin to slow to 30.20 percent in 2018 compared to 36.93 percent achieved in the previous year.

Naturally, when inflation increases, firms would try to manage their costs by employing the most efficient technology to use, but would also try to increase the cost of their products so they remain profitable.

Since consumers would normally reduce quantity demanded when price increases, the ability of firms to still secure demand in event of a price hike is seen as a successful transfer of costs to consumers.