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There is not going to be much breathing room for Nigerian firms as their profit margins are contracting, raising concerns entities might opt to lay off workers to cut costs to stay afloat.
With inflation still strong, the ability for companies to maintain sable margins and remain efficient is being closely watched by some investors and strategists as first quarter earnings reports from the NGXASI 30 index showed the net profit margins of the largest firms fell to 19.36 percent from 23.92 percent as at March 2022.
A key factor for margins is the spread between costs and the ability of firms to pass those costs on, and companies may have a harder time passing on cost inflation.
Companies, especially manufacturers have been groaning under foreign exchange illiquidity, higher logistic costs, higher energy costs, decrepit infrastructure, hefty levies and taxes.
There is also the war between Russia and Ukraine which sent the price of wheat, corn, and barley soaring bloating the cost of raw materials.
Nigeria’s inflation rate rose to 22.04% in March 2023, the highest since 2009, according to a recent Consumer Price Index report released by the National Bureau of Statistics (NBS).
The price instability forced the central bank to embark on an aggressive tightening campaign that drove lending rates northward stunted new projects in the property and construction markets, while it undermined margins.
Of course, rising borrowing costs suppresses stock valuation and causes a reduction because firms will be spending more to service their debts and it also makes firms slow down on expansion plans, a double whammy for a country with high unemployment rates and poor people.
The Central Bank of Nigeria raised its monetary policy rate to 18% from 17.5% in its February 2023 meeting, marking the second interest rate hike in 2023.
KPMG has stated that the Nigerian unemployment rate had increased to 37.7per cent in 2022 and will further rise to 40.6per cent, due to the continuing inflow of job seekers into the job market.
The average net profit margin of NGX consumer goods index, the list of the most liquid and well capitalised firms, reduced to 4.64 percent in March 2023 from 7.60 percent the previous year.
Nigerian Breweries and International Breweries posted net losses of N10.75 billion and N2.30 billion respectively, while Flour Mills, Guinness and Unilever suffered a drop in profit.
Analysts say foreign exchange restriction on wheat amid low production is recipe for disaster. Local wheat production remains abysmal due to climate change, insecurity in cultivation areas, unavailability of improved seeds, and lack of modern agronomic practices.
The consumer goods sector outlook remains broadly positive, owing to the several growth initiatives implemented by players in the industry, according to analysts at Afrinvest Securities.
“However, we do not foresee a considerable moderation in production cost as the current headwinds impacting raw material prices persist. Although, we expect the continued domestic demand and implementation of growth initiatives to support revenue, the ability to keep costs in check is also expected to prop up earnings,” said the analysts.
The NGX Consumer goods index has gained 25.73 percent so far, outperforming the NGSASI index returns of 0.22 percent.
The average net profit margin of the three dominant cement makers-Dangote Cement, BUA Cement, and Lafarge Africa– reduced to 22.80 percent in March 2023 from 26.53 percent the previous year
These firms collectively incurred N174.68 billion in material, fuel, and maintenance costs, according to data gathered by MoneyCentral.
The NGX industrial index has year to date gains of (ytd) of 1.95%, which underperformed the All-Share-Index.
The erosion of spending power and higher inputs cost owing to soaring inflation pose risk to cement demand, according to analysts at Afrinvest Securities.
“On geopolitics, the Ukraine-Russia war is worsening the energy crisis and world trade (higher freight rates, sanctions, and counter sanctions),” said the analysts.
Seplat Energy Plc, the largest indigenous oil and gas firm in Nigeria, saw net margins fall to 11 percent in March 2023 from 15.98 percent the previous year, no thanks to N33.01 billion of crude over-lifted above the cost of production.
TotalEnergies’ net margin fell to 11 percent in March 2023 from 15.93 percent the previous year as the largest downstream oil and gas firm is reeling from inflationary pressures, foreign exchange liquidity constraints, and inadequate infrastructure.
Experts have warned that the new tax law captured in the 2023 Fiscal Policy measures recently introduced by the federal government, is capable of ‘worsening the economic woes of helpless Nigerians who have to contend with dwindling purchasing power.