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Monday, May 29, 2023

Gross Margin for Nigerian Companies to Compress on Red-hot Inflation

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The gross margin of Nigerian companies will be squeezed by an unprecedented increase in input costs across the board led by global crude oil prices, surging diesel prices, electricity supply shortages and higher Agric raw materials due to insecurity in the North and Middle belt regions of Nigeria.

Analysts are of the view that the recent geopolitical tensions which created an energy crisis will result in red hot inflation, while normalization of margins are unlikely.

The average Gross margins-the difference between net sales and cost of goods sold- of Nigeria’s companies increased to 33.21 percent in December 2021 from 32.27 percent as at December 2020, according to MoneyCentral calculations.

Drilling down the numbers shows the cement makers, oil palm producers, conglomerates, and telecommunications were the major drivers of gross margins, but the consumer goods firms who felt the pang of rising input and foreign exchange scarcity witnessed deteriorating ratios.

Of course, the reopening of the economy after a long hiatus due to the lockdown policy imposed by the government to curb the spread of the coronavirus pandemic and hike in the price of key products underpinned revenue and net profit.

The Nigerian economy expanded by 3.98 percent year on year (yoy) in Q4-2021 and 3.40% yoy in FY-2021, according to data from the National Bureau of Statistics (NBS).

This year will be tough for companies. The rally in crude oil price is spurring the price of diesel oil used in factories, Agric, mining, and offices.

Global crude oil prices have rallied more than 50 percent in the past six months while several base material prices for wheat and grains have surged after Russia’s invasion of Ukraine.

The lofty input prices that companies find hard to pass onto consumers have raised concerns over the market’s assumption that earnings could grow north of 20 percent in 2022-23.

 The headline inflation for the month of February climbed 10bps to settle at 15.7% y/y, from January’s 15.6%, according to the latest data from the NBS.

“It is glaring that the geopolitical tension and its negative impact on industrial oil will balloon the operating cost of companies unless they are able to pass on the higher input cost to consumers,” said Johnson Chukwu, managing director and CEO of Cowry Asset Management.

“However, because consumer wallets are already squeezed, firms can’t pass 100 percent of the cost unless demand will reduce,” said Chukwu.

Consumer income has been bleeding profusely and they have been rationing to prioritize necessity in a country where over 50 percent of a population of 200 million people live on less than $1.98 a day.

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