Listed manufacturers in Africa’s largest economy run on huge cost that undermines profit margins, as a difficult business environment continues to batter bottom-lines.
Data compiled by BusinessDay show the total cost of production (cost of sales plus administrative and distribution expenses) of the largest companies hit N1.94 trillion as at September 2020, which is 80.15 percent of their combined revenue of N2.41 trillion.
That means shareholders are missing out in terms of higher dividend and profits that would have added impetus to their portfolios of returns.
Analysts attribute the increase in cost of production to the impact of foreign exchange devaluation on imported goods, which is inimical to companies that cannot pass on rising costs to already beleaguered consumers in the form of higher prices.
“There are all sorts of illiquidity in the market and manufacturers are feeling the pains. Even though the exchange rate is weak, the items banned from the official window of the central bank possess great challenge for those that play in that space,” said Adedayo Bakare, associate, Investment Research, Afrinvest.
“There is also Covid-19 and spiralling inflation combined with the border closure,” Bakare said.
Aside spiralling energy cost as electricity from the grid is unreliable, manufacturers have cried over the huge cost of clearing cargos from Nigerian seaports, describing it as a cankerworm that has forced many companies to close shop.
The largest consumer goods firms collectively incurred total production cost of N1.12 trillion as at September 2020, which is 89.33 percent of combined revenue of N1.25 trillion.
The three dominant cement makers (Dangote Cement, BUA Cement, and Lafarge Africa) collectively incurred N718.03 billion in cost in the period under review, which is 65.01 percent of combined revenue of N1.09 trillion.
Drug makers are also groaning under huge cost, but they have been able to record double digit growth in profit.
Total production cost of the dominant players stood at N32.71 billion in the period under review, which is 89.56 percent of combined revenue of N36.53 billion.
“We are dealing with an inflation rate of 13 percent and weak consumer spending that makes it difficult for manufacturers to pass on these costs to consumers in the form of high prices,” said Johnson Chukwu, CEO of Cowry Asset Management Limited.
The high cost of doing business in Nigeria could force many companies to shrink their workforce as they may find it difficult breaking even, a triple whammy for a country with one of the highest unemployed people in the world.
Notably, confidence in the economy has remained dampened as the Purchasing Managers’ Index (PMI) released by the Central Bank of Nigeria (CBN) showed employment had contracted across focal areas of manufacturing and non-manufacturing sectors in October.
In the manufacturing sector, the employment index stood at 46 points, indicating a contraction for the seventh consecutive month.
Nigeria’s economy has been hobbled as the coronavirus pandemic has triggered a crash in the price of oil, its main export, and an exodus of foreign investors.
Nigeria is likely to enter recession in the third quarter after its economy contracted 6.1 percent in the second quarter. The government expects the economy to shrink as much as 8.9 percent this year.
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