Despite marginal revenue growth in Q2 2023, a wide range of Nigerian companies have reported substantial reductions in their profit margins.
The downturn is consistent across sectors, excluding banks and insurance firms, according to recently released financial statements.
A survey of the second quarter results of about 28 companies cut across manufacturing, telco, oil and gas, and consumer goods companies reveal their profit margin dipped to just 2.53% in the second quarter of 2023.
This compares to 15.63% in the first quarter of 2023 and 14.35% in the second quarter of 2022.
Whilst the companies reported a combined revenue of N2.67 trillion in the quarter under review (N2.369 trillion in Q1), their profits dipped to N67.5 billion (compared to N379.3 billion in Q1 and N302 billion a year earlier).
Beta Plc, a leading manufacturing firm, reported a Q2 2023 revenue of N14,857.99 million, showing little change when compared to N14,983.72 million in Q1 2023.
However, their profit after tax for the quarter was N2,159 million, only a slight increase from N1891 million in the previous quarter.
Similarly, BUA Foods, one of Nigeria’s top food production companies, announced a Q2 2023 revenue of N176,611.95 million, a substantial increase from N144,318.35 million in Q1 2023.
Despite this, the company’s profit after tax for Q2 rose to N54,648 million, which is not proportional to the increase in revenue.
BUA Cement also reported profitability growth. These were the only few companies that reported improved margins. The rest reported profitability dips.
Margin dips across most companies
Two other companies, Cadbury Plc and Dangote Sugar, reported concerning drops in their profit margins. Cadbury Plc registered a Q2 2023 revenue of N19,044.63 million but saw a dramatic decrease in profit after tax swinging into a loss of N17.9 billion.
Meanwhile, Dangote Sugar revealed its Q2 2023 loss after tax as N40.79 billion, a significant decrease from N11.3 billion same period in 2022, even though revenues rose slightly.
The telecom giant MTN also reported subdued profit margins. Despite a Q2 2023 revenue of N590,605.00 million, the company’s profit after tax fell to N27.2 billion from N84.8 billion in the same period in 2022.
Cement giant, Dangote Cement also reported margin drops with profits of N69 billion in the second quarter which represented a profit margin of 12.7% compared to 16.78% same period in 2022.
This trend of shrinking profit margins, despite marginally increasing or stable revenues, has been observed across the board for the second quarter of 2023.
Financial experts speculate that various economic factors could be contributing to this phenomenon, but no official explanations have been offered by the companies in question.
Experts attribute this concerning trend to a multitude of factors including the depreciation of foreign currency after the unification of the exchange rate window, the removal of fuel subsidies, and persistently high inflation rates.
The devaluation of the Nigerian Naira following the unification of the exchange rate window has notably affected operating expenses, especially for companies reliant on imported raw materials. Forex losses have compounded the issue further.
In addition, the removal of fuel subsidies has spiralled transportation and energy costs upwards, impacting bottom lines.
The unification of the exchange rate window was aimed at creating a more transparent and efficient forex market. While the intention may have been noble, the immediate repercussions have been harsh for businesses.
Similarly, the removal of fuel subsidies, intended to reduce government expenditure and allocate funds to other sectors, has resulted in increased operating expenses for companies, thereby impacting their bottom line.
For example, Dangote Sugar swung into losses after it reported a whopping exchange rate loss of N83 billion in the second quarter of 2023 alone. Cadbury reported an unrealized exchange rate loss of N21.2 billion in the first half of 2023.
Nigeria’s telecoms giant, MTN also reported an unrealized forex loss of N131.5 billion in the first half of 2023, forcing a margin drop.
MTN also suggests its outlook for the rest of the year will depend on “the impacts of the levels of the exchange rate and the new VAT on tower leases effective September 2023” which it considers a key near-term risk to its medium-term guidance.
Dangote Sugar also blamed its losses on the impact of the devaluation of the Naira compared to the USD. Looking forward it suggests paying down its forex loans will be its strategic focus.
- “The adoption of cost optimization strategies, including strategies to defray FX-denominated obligations will remain a major focus, as well as maintaining customer satisfaction, product quality, production, and supply chain efficiency.”
Outlook for the rest of the year
As the investment community eagerly anticipates third-quarter financial results, the prevailing economic conditions are becoming an increasing concern for investors.
Recent data from the Purchasing Managers’ Index (PMI) indicates that companies are grappling with rising cost pressures, leading to a notable uptick in their expense columns.
Conversely, many companies are encountering obstacles in raising their selling prices, as the purchasing power of the average Nigerian continues to diminish.
This presents a double-edged sword for businesses, as they struggle to navigate the complexities of an uncertain economic landscape.
