A combination of rising interest rates and naira devaluation has dealt a severe blow to the financials of many fast-moving consumer goods (FMCG) firms as their borrowing costs skyrocketed in the first half of the year.
Analysis of the data from their financial statements show that the total finance cost of 10 FMCG firms rose by 469.4 percent to N376.4 billion in H1 2023 from N66.1 billion in the same period of last year.
The firms are Nestle Nigeria, Unilever Nigeria, Cadbury Nigeria, BUA Foods, Nascon Allied Industries, Dangote Sugar Refinery, Nigerian Breweries, Guinness Nigeria, International Breweries and Champion Breweries.
Finance costs, also known as the cost of finances, are costs, interests, and other charges involved in the borrowing of money to build or purchase assets.
Analysts say the increase in finance cost is as a result of the naira devaluation in June and the rise in the benchmark interest rate, also known as Monetary Policy Rate, which has been raised by 725 basis points to 18.75 percent since May last year.
This puts more pressure on the margins of FMCG companies, already dealing with double-digit inflation rate and weak purchasing power of cash-strapped consumers.
“The movement in interest rate and the devaluation impact are the two major elements that are affecting the cost of securing finance for the FMCG firms,” Abiodun Keripe, managing director at Afrinvest Consulting Limited, said.
He said the companies’ bottom-line will be weaker and margins will become slimmer, thereby affecting their profitability. “Volumes may not rise quite aggressively or revenue may not increase at a faster pace.”
Israel Odubola, a Lagos-based research economist, said the over fivefold increase in borrowing costs shows that some of the companies had foreign currency-denominated loans in their books and by the time the naira was devalued, it increased the naira value of those debt obligations.
“Finance cost is a deduction in an income statement. So, it will weigh on the profitability, which is what is happening. Most of the companies that are multinationals are badly affected because they had FX exposure. Had it been they took local loans, the increment in finance cost will not be up to that,” he added.
A breakdown of the data shows that Cadbury Nigeria recorded the biggest increase in finance cost of 22,394.9 percent to N21.8 billion from N96.7 million. Guinness Nigeria saw its finance cost jump by 2,401.9 percent to N53.3 billion from N2.13 billion.
The finance cost of Nestle Nigeria surged by 1,878.2 percent to N137.73 billion. Dangote Sugar’s finance cost rose by 1,140.2 percent to N90.7 billion, while that of Nigerian Breweries increased by 262.5 percent to N11.2 billion.
Others are Unilever Nigeria, whose finance cost grew by 135.6 percent; International Breweries, 127.9 percent; Nascon, 119.4 percent; BUA Foods, 54.0 percent; and Champion Breweries, 12.7 percent.
“Finance cost means that you raise naira to pay for dollars used to import raw materials. The dollar will remain the same but the naira needed to finance it increased. This is why some of them declared heavy losses,” Gabriel Idahosa, deputy president of Lagos Chamber of Commerce and Industry, said.
