Cardinalstone: FMCG losses may subsist due to FX pressures

The fast-moving consumer goods (FMCG) sector in Nigeria continues to face challenges due to elevated foreign exchange pressures, leading to half-year losses for many players in the industry. Analysts at Cardinalstones Securities believe that these losses may persist, as the devaluation of the currency remains a significant factor affecting the sector. Ngozi Odum, an Equity Research Analyst at Cardinalstones Securities, highlighted the impact of the currency devaluation on FMCG companies. Despite some tactical moves by companies to limit their foreign currency exposures, substantial losses are expected to remain due to their foreign liabilities. While some companies like UACN have reported FX revaluation gains, the majority of players in the sector are vulnerable to FX fluctuations. One of the key challenges facing FMCG companies is the need to pass on price increases to consumers to offset margin pressures. In an environment of elevated inflation and rising costs, companies are finding it difficult to maintain their margins. While some companies have implemented price increases, the ability to do so without impacting volume sales is limited, leading to further margin compressions. The exchange rate instability in Nigeria adds another layer of complexity for FMCG companies. With the Naira fluctuating between the NAFEM and parallel markets, companies struggle to plan for future FX rates. However, there has been some relative stability in the exchange rate in recent months, offering a glimmer of hope for the industry. Companies are also taking tactical measures by unwinding FCY liabilities and focusing on backward integration to reduce their exposure to foreign exchange risks. In contrast to the FMCG sector, the banking sector is facing a different challenge with the proposed 70% windfall tax on FX revaluation gains. The implications of this tax increase are yet to be fully understood, as there is still uncertainty surrounding the criteria for applying the tax. If implemented, the tax hike could lead to higher effective tax rates for banks, impacting their profitability. Overall, the FMCG sector in Nigeria is navigating through a challenging landscape marked by currency devaluation, margin pressures, and uncertainty surrounding FX rates. Companies are adopting various strategies to mitigate these risks, but the road ahead remains bumpy. As the industry grapples with continued losses and external pressures, resilience and adaptability will be key to weathering the storm.