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Business News of Tuesday, 17 August 2021

Source: punch.ng

Forex scarcity, others put pressure on FMCG companies’ profits

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Analysts have identified scarcity of foreign exchange, inflationary pressures and rising input costs due to naira devaluation as responsible for the shrinking profit margins of some fast-moving consumer goods companies listed on the Nigerian Exchange Limited despite an overall increase in revenue.

An analysis of unaudited financial statements of consumer goods companies by our correspondent revealed that four of them saw either reduced profit margins or loss while two reported profit rise in the first half of this year.

Nestle Nigeria Plc, the largest FMCG company listed on the NGX by market capitalisation, saw its profit before tax in H1 2021 decrease by 1.43 per cent year-on-year to N33.38bn despite a revenue increase of 21.57 per cent.

International Breweries Plc recorded a 43.71 per cent in its loss before tax, which deepened to N17.22bn in H1 2021 from N11.98bn in the corresponding period of 2020, even as its revenues rose by 35.22 per cent from N60.61bn to N81.96bn.

Cadbury Nigeria Plc posted a loss before tax of N516.17m in H1 2021, compared with a profit before tax of N766.66m in H1 2020. Its revenue, however, increased by 16.37 per cent to N18.52bn from N15.92bn.

Dangote Sugar Refinery Plc recorded an increase of 13.91 per cent in its pretax profit, from N17.04bn in H1 2020 to N18.76bn in 2021. It recorded a 14.22 per cent profit margin in H1 2021, down from 16.51 per cent in the previous year.

NASCON Allied Industries Plc recorded a decrease of 6.37 per cent in its profit before tax.

However, Unilever Nigeria Plc and Nigerian Breweries Plc were able to grow their profit before tax by 168.88 per cent and 43.07 per cent respectively during the same period.

Unilever was able to recover from a N566.80m loss to a N1.03bn profit, while Nigerian Breweries increased its profit to N11.94bn from N8.35bn.

A research analyst at Atlas Portfolios Limited, Olaide Baanu, told our correspondent that the reduced profit margins were a result of an increase in transportation cost, high electricity tariff and decline of the naira against the United States dollar in the forex market.

Baanu said, “The cost of sales for the overall industry rose by 32.42 per cent to N382.43bn from N288.82bn in H1 2020. It grew faster than revenue as prices of raw materials used by the manufacturers increased over the period due to inflation and naira depreciation.

“In the Investors and Exporters window, where most of the companies access the USD for the purchase of some inputs, the naira declined by 6.47 per cent from the closing position of N385.5/USD in June 2020 to N411.5/USD in June 2021.”

The Head of Research and Strategy at Cordros Capital, Jolomi Odonghanro, told our correspondent that the increase in revenue growth across the Nigerian consumer goods industry was underpinned by increases in average prices of products, improved demand following the reopening of the economy and the pandemic-induced low base effect.

He, however, said the impact of solid topline growth on the companies’ earnings was weakened by higher cost pressures in cost of goods sold, operating expenses and finance costs.


He said, “The preceding reflects the challenges in the business environment during the period, resulting from the impact of elevated inflationary pressures on raw material cost, energy and other input costs amid the resurgence of the COVID-19 virus. In addition, the naira devaluation, muted infrastructural development and foreign currency constraints also contributed to higher operating costs.

“We expect sustained double-digit growth in the consumer goods sector over the rest of the 2021 financial year following the impact of price increases amid improving demand. However, we project a slowdown in the pace of revenue expansion in the medium term as the impacts of price increases and low base fade.”

Odonghanro said higher operating costs would continue to drag consumer goods companies’ earnings in the near term, given the still elevated inflationary pressure and forex liquidity challenges.

“Overall, we expect positive performance over the rest of 2021FY as the gradual rebound in economic activities support improved demand in the near term,” he added.