The negative impacts of a weaker currency and stubbornly-high inflation will likely worsen in the second half of 2023. The naira devaluation at the I&E window that trailed the monetary policy reforms could drive the costs of imported raw materials higher and stoke material foreign exchange losses. In addition, even though most consumers are insulated from the impact of the depreciation at the I&E (as they mostly access FX at the parallel market), the combined impact of subsidy removal and the potential increase in electricity tariffs suggests that discretionary income could become weaker. Notwithstanding, the ongoing moderation in select commodity prices and companies' strategic responses could act as offsets.
Currency disruptions moderate output growth
Price increases were at the centre of 2022's menu. FMCG companies transferred input cost burdens to Nigerian consumers, resulting in strong EBIT margins for some of our coverage companies despite some volume pullback. However, volume contraction was a focal problem in 2023, with negative reactions to higher prices and, notably, the currency redesign policy, leading to a material decline in consumer demand for products. As a result of the latter, the average topline growth of coverage names nosedived to 5.0% YoY between January and March 2023 (vs 28.1% YoY in the corresponding period of 2022).
We, however, note that the impact of the cash crunch was uneven across our coverage names due to the following reasons:
Target customer – We believe that the effect of the cash disruption was more pronounced on retail customers, who mostly transact with cash compared to large institutional off-takers of FMCG products. Hence, companies strategically positioned to serve these huge institutions were mostly insulated. A perfect example is DANGSUGAR, whose revenue is principally (96.0% on average) from the 50kg segment (fortified and non- fortified sugar), which is usually demanded by factories (bakeries, pharmaceuticals, and confectioneries). Conversely, given that 80.0% of its retail sales are cash-driven, NB was negatively affected by the naira scarcity.