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No respite for investors as rising costs shrink FMCG firms' earnings

The effect of naira devaluation, rising inflation and interest rate hikes has continued to take a huge toll on the performance of firms under the fast-moving consumer goods (FMCG), causing their financial cost to soar.

Aside from the naira devaluation last year, there has been a sharp increase in the monetary policy rate (MPR) since the beginning of the year 2023. This has continued to erode the purchasing power of Nigerians, putting more pressure on the margins of FMCG companies and negatively impacting their bottom line.

Honey Flour Mills, another leading flour miller, reported a 28 per cent YoY growth in its revenue to N188 billion from N147 billion in the previous year.

However, due to rising costs and soaring interest rates, which have affected the cost of funds, the company incurred N36 billion in the net cost of finance for the operating year, representing a leap of 160 per cent YoY from N14 billion in 2023 and translating into a net loss after tax of N10.1 billion from a profit of N256 million.

Operators said the rising interest rate and devaluation are the two major elements that are affecting FMCG companies as some of the companies had foreign currency-denominated loans in their books. The loans increased in naira value on the back of the depreciation of naira. This has resulted in the loss of position for many firms in the sector, making it difficult for most of them to pay a dividend.

Aside from the FMCG, six multinationals operating in Nigeria incurred combined losses of up to N540 billion last year even as they also have wide holes in their operations to plug which may not enable them to pay dividends until they fully recover from these losses.

From May 2022 to October 2023, MPR was raised by 725 basis points to 18.75 percent. This year, the interest rate was raised by 200 basis points from 22.75 per cent in February to 24.75 per cent in March 2024.

Last month, the Monetary Policy Committee of the Central Bank of Nigeria also increased the benchmark interest rate by 150 basis points from 24.75 per cent to 26.25 per cent.

President of New Dimension Shareholders Association of Nigerian, Patrick Ajudua, said the FMN recorded improved top-line performance of N2.3 trillion despite that the firm incurred N137.5 billion in foreign exchange losses as against N31.5 billion suffered in the previous year because of naira devaluation which increased its cost of servicing foreign loans.

“Most companies in the manufacturing sector suffered much from the effect of naira devaluation, inflation, high-interest rate and energy cost. This has resulted in a loss position and made it difficult for most of them to pay dividends,” he said. Head Equity, Planet Capital, Paul Uzum said the last year has been very tough for firms in the consumer goods sector.

“Not only Flourmills but firms like Dangsugar, Honeywell, Nestle, NB, Guinness, Unilever, Cadbury and PZ. They were all hit by two factors, one is the massive devaluation of the naira which made most of them record exchange losses,” he said.

According to him, the rising poverty, inflation, and unemployment are causing a fall in demand for most goods in Nigeria as consumers are currently focusing on the purchase of only essential goods and well as switching to cheaper alternatives where possible.

“For Flourmills, it is expected that this loss is a one-off event, and the company will revert to its winning ways of consistent profit-making by the next financial year.”

Head of Research, FSL Securities, Victor Chiazor, said the consumer food sector was significantly impacted by the FX policy, particularly those exposed to foreign loans or importing their raw materials.

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