Ten major manufacturing firms in Nigeria, mainly in the consumer goods group, reported a total of N517.1 billion in non-recovery, net foreign exchange losses in the first half of the year (HY 2023), arising from the devaluation of the naira.
The Central Bank of Nigeria (CBN) had in June 2023, announced the unification of the multiple exchange windows which now requires all transactions to be conducted at the Investors’ and Exporters’ (I&E) window. This has resulted in a significant depreciation of the naira by over 60 percent to N770/$ (as of July 2023) against the N465/$ it had traded prior to the forex reform.
The development impacted severely on the balance sheets of Nigerian businesses who have to source extra funds in local currency to meet their dollar-denominated obligations.
Data gleaned from financial statements of the selected firms revealed that the huge forex losses impacted severely on their earnings and drained their bottom lines amid rise in inflation. This resulted in a total pre-tax loss of N695.03 billion in HY 2023 against pre-tax profit of N637.61 in the corresponding period of 2022.
The eroding wave of depreciation also resulted in total post-tax loss of N370.57 billion by the 10 firms, compared with N175.9 billion post-tax profit they posted in the equivalent period of the preceding year.
Findings further revealed that Nestle Nigeria Plc and Dangote Cement Plc were the worst hit with non-recovery net forex losses of N123.7 billion and N113.6 billion respectively. They are followed by Nigerian Breweries Plc N85.26 billion, Dangote Sugar Refinery Plc N83.09 billion and Guinness Nigeria Plc N41.9 billion.
Others are International Breweries Plc with N40.66 billion, Neimeth Pharmaceuticals Plc N22.82 billion, Unilever Plc N2.93 billion and Cadbury Nigeria Plc N1.03 billion.
“It is a bad omen.” said Barnabas Ikuru, an investment and financial analyst. “Their balance sheets have been significantly eroded, their earning power vitiated, and their expansion capacity weakened. Top among the victims are the employees who may be laid off, downgraded or suffer a salary cut. Some companies will have to increase the price of their products and that would impact their sales revenue because of consumers declining purchasing power,” Ikuru added.
The affected companies had sour narratives while unveiling their interim half-year results which were dotted with huge exchange losses that countered their impressive performance last year.
The Managing Director/CEO, Nestle Nigeria Plc, Mr Wassim Elhusseini, noted that the company’s profit after tax was negatively impacted by the recent devaluation of the naira, which necessitated the revaluation of its foreign currency obligations.
Nestle posted a pre-tax loss of N69.11 billion in the 2023 half-year, against a pre-tax profit of N43.73 billion in the corresponding period of last year. Similarly, it reported a post-tax loss of N49.98 billion compared with a profit of N27.75 billion in the equivalent period of last year.
Dangote Cement had little to show for the 17.7 percent increase in the record N950.8 billion half-year sales compared to a year ago as its net exchange loss on dollar-denominated transactions more than doubled from N40.7 billion in HY 2022 to N113.66 in HY 023.
“Net exchange loss on foreign-denominated transactions is due to material devaluation of the Nigerian Naira in June 2023,” Dangote Cement said in the notes to their filinn, adding “The naira moved from N465/$ at end of May 2023 to close at N756/$ in June 2023.”
That negative outcome triggered a net exchange loss of N116.1 billion resulting from the elevated currency conversion rate for the repayment of the group’s foreign loans and payable in its Nigerian home market.
Dangote Cement, which operates in 10 countries in Africa, turned in more than 90 per cent of the loss in the second quarter alone.
Another consumer goods firm, International Breweries Plc, reported a more significant loss per share of N0.79 in Q2-23 (vs loss per share of N0.01 in Q2-22), bringing the H1-23 loss per share to N0.88 (vs EPS of N0.01 in H1-22). The brewer’s performance in the period was negatively impacted by the significant increase in unrealised FX loss (+452.5 per cent y/y) and higher net finance cost (+221.6 per cent y/y). In Q2-23, the brewer’s revenue increased by 14.6 per cent y/y.
“We believe the topline expansion in the period was majorly price-driven, as our finding shows the brewer increased prices by c.12.5 per cent in the year. However, for H1-23, revenue growth grew slower by 4.2 per cent y/y due to the impact of a cash crunch experienced in Q1, which negatively affected revenue generation in the period (-5.4 [per cent y/y),” analysts at Cordros Securities said in a note to their clients.
Analysing the performance of the company, Cordros said gross margin contracted by 20bps y/y to 23.3 per cent in Q2-23 (Q2-22: 23.5 per cent), following a faster growth in cost of sales (+14.9 per cent y/y) relative to revenue (+14.6 per cent y/y). It attributed the higher cost of sales to increased input and overhead costs, influenced by the prevailing highly inflationary environment.
As expected, International Breweries reported an operating loss of N31.72 billion in Q1-23, contrasting sharply with an operating income of N1.71 billion in Q2-22. The loss resulted from a substantial 20.4x increase in other expenses, totalling N33.31 billion (Q2-22: NGN1.71 billion). The surge in other expenses was primarily due to a significant unrealised foreign exchange loss of N41.89 billion (+452.5 per cent y/y).
“Like other industry players, the company also experienced cost pressures stemming from the devaluation of the naira and higher finance costs. Looking ahead, we expect the company’s revenue to benefit from better cost-reflective prices and increased volume growth.
“Nevertheless, our short-term outlook for the brewer remains unimpressive, as we expect earnings to remain dampened by the challenging operating environment, particularly with the devaluation of the naira,” Cordros Securities said.
The unification of the forex market into I&E window which has become the sole channel for all official foreign exchange transactions is a challenge to Nigerian businesses as forex scarcity remains. Before the abolition of multiple exchange platforms, there were the CBN, Inter-Bank, Small Businesses and Invisible forex windows.
The multiple forex windows competed for the scarce forex with the government licensed Bureaux the Change (BDE) and the parallel or black market operators. The scarcity of the dollar in the official window usually forces buyers to patronise the parallel market where the dollar sells much higher with a wide gap yet easily accessed. This led to unfettered arbitrage.
The unification of the forex windows on June 14, 2023 plunged the naira to N664.04 on the same day before deepening further to N702.19 the following day. The naira has remained floating since then hitting over N800/$ at a time, while the parallel market has maintained the lead in depreciation with a gap of over N100.
THEWILL findings showed that the naira exchanged at the average of N777/$1 in July at the I&E window, as against N875/$ at the parallel market, creating a gap of N98.
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
