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Tuesday, June 6, 2023

Manufacturers Deteriorating Profit Margins Validate GDP contraction

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Manufacturers in Africa’s largest economy are not efficient in converting per Naira sales into profit as the sector activity contracted due to a myriad of challenges.

The average industry net profit margin of manufacturers reduced to 7.61 percent in September 2022 from 8 percent as at September 2021, according to MoneyCentral calculations.

Similarly, average industry operating income margin fell to 14.62 percent to N14.62 percent in September 2022 from 16.02 percent the previous year.

A low-profit margin indicates higher risks, implying that a revenue drop might dampen profits, pushing the company in the red.

The manufacturing sector contracted by -1.9 percent in the third quarter of (Q3) of 2022 compared with a growth +4.3 percent in the corresponding period (Q3) 2021, according to the latest data by the National Bureau of Statistics (NBS). 

The growth in the manufacturing sector has been deterred by rising operating costs stoked by FX illiquidity, high interest rate, and weak infrastructural amenities, and the sustained spillover effect of the Eastern Europe crisis on input costs.

It must be noted that the incessant devaluation of the currency by the regulator that seeks to stabilize the economy and protect the external reserve further stokes imported inflation as the majority of companies import raw materials from abroad to meet production.

There are also concerns that firms might not be able to pass on rising input costs to consumers in the form of higher prices as Nigerians are flayed by rising utility bills and high transport fares while inflation erodes purchasing power. And that is a double whammy for sector players who have been riding on the waves of hike in the price of key products that adds impetus to sales growth.

Nigeria’s inflation rate increased by 0.32 percent points from the 20.77 percent recorded in September to a new 17-year high of 21.09 percent in October 2022, according to data from the NBS.

Manufacturers on the NGX collectively incurred N2.70 trillion in total operating costs or expenses, which is 29.39 percent higher than 2021’s N2.09 trillion, according to data gathered by MoneyCentral.

”The Manufacturers Association of Nigeria (MAN) is concerned about the ripple effects of this decision and its implications for the manufacturing sector that is visibly struggling to survive the numerous strangulating fiscal and monetary policy measures and reforms.

“Consequently, manufacturers are hopeful that the stringent conditionality for accessing available development funding windows with the CBN will be relaxed to improve the flow of long-term loans to the manufacturing sector at single digit interest rate,” the statement posited,” said the Group.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) last month, hiked its Monetary Policy Rate (MPR) for the fourth time by 100 basis points to 16.5 percent.

The CBN has aggressively raised interest rates to combat inflation, a move that has driven up the cost of debt.

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