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High Cost of raw materials ,Huge Debt Profile Put Nigerian Breweries in a tight corner of weak margins ,tight liquidity

In the last few financial years, specifically from 2015 till date, the competitive space in the brewing industry was paved with operational obstacles, setting up the industry for failure. Frankly, the risk to the players in this industry is the shrinking market as prices cannot be cut forever;  making  productivity improvements to reduce costs remain  a major differentiating factor in a highly competitive brewing industry .

The above is a big  challenge,  that has ,indeed,  put every player in a tight corner .Nigerian Breweries, a major and dominant industry player, could be not shielded from these stormy circumstances; the  company  has been fighting hard to meet the challenges of the prevailing rough competitive space; specifically , the brewer is  battling with a tale of high cost of raw materials and huge debt profile . Both issue are compounded by the pains of another big cost of its diversified lease arrangements . So far, it has been very herculean  .While it has won some of the above battles, others remain resilient.

Despite the above challenges a well as increased competition and the fall in consumers that affected it , this company  Plc remains profitable ,growing revenues albeit negligible rate . It reported another successful year in 2021 as significant growth in sales revenues  operating and net  profits were achieved ;it  also  announced a final dividend of N1. 20 per share after recording N437 billion  revenue for 2021, a 30 per cent increase over previous year’s sales figure. That brings its total dividend declared for the year to N1. 60 per share, summing up to a payout of N12  .

However, beyond the above growth in revenue and net profit as well dividends given to its share investors , the battle is not yet over ;the profit margins remain miserable as high cost of doing its businesses rages  while its liquidity is tight due to cash inadequacy . But while the gross and net profits are driven by higher cost of sales as inventories continue to pill up  the  debtors which delayed payments longer than necessary  as well as creditors  the company could not be settled on time  are all its hallmark in the past years..This is unlike the Nigerian Breweries of old    


Specifically, one of its biggest hard nuts difficult for it to break is the unfavorable financial and business environment that led to the increase in the prices of raw materials and disruptions in logistics for Nigerian Breweries. In the 2020 financial year, raw materials and consumables witnessed a 17% increase .In a bid to tackle the skyrocketing cost of raw materials and other operational challenges, the company has been riddled or trapped with high volume debts; this is its biggest headache as it further compounded its cost situation and drove it dangerously down the path of a dinosaur

In 2020, its loan stock skyrocketed ;between 2019 and 2020 alone, long term loans and borrowings increased by 974% from N4.8 billion to as much as N51.8 billion ; it has revolving credit facilities with five Nigerian banks to finance its working capital. The approved limit of the loan with each of the banks range from ₦6 billion to ₦15 billion (total of ₦66 billion) and each of the agreements had been signed in 2016 with a tenor of five years. The Company had also obtained Capital and Working capital finance from the Bank of Industry, BoI, in 2019. Furthermore ,  following reclassifications made in 2019 to some of its lease assets, the 2020 asset base also witnessed significant increase in Right of Use Assets which increased by 288%% from N11.1 billion to N42.9 billion.  Sequel to these huge banks loans, Net finance costs fell slightly to N17.79b from N18.03b while its Finance income hit N313.5m from N246.3m. The rising debt stock could be viewed again from its debt to equity ratio which rose from 13% in 2015 to 33% in 2019 .

The above threats ,which could be quickly situated on the deleterious operating clime ,have almost brought it to its knees, unleashing big drawbacks against its bottom line ;no doubt ,the brewer has been turned a mere leviathan entity with Lilliputian values ; a brewery giant in sliding mode in the last few years. While the group’s 2020 results revealed a 4.35% increase in revenue from N323 billion in the prior year to around N337 billion, these gains were curtailed by a higher-than-par increase in cost of sales which had risen by 13.9%, from the N191.8 billion expended in 2019 to N218.4 billion as its 2020 financials reveal and as the interest rates inched up .The company’s lower operating expenses were not enough to salvage the disruption caused by the raging interest expense following increased charges paid on bank loans and overdraft facilities as well as the significant increase in overall debt. Those challenges between 2019 and 2020 highlighted above trailed the management to 2021 and till date not yet over


In 2021 ,the company appeared to have changed that strategy ,paying back large part of its debts while heavily beating down its high cost of operations .No doubt, in the soonest, Nigerian Breweries will stage a strong comeback ;it has remained clearly undaunted, cutting the wings of the soaring costs and optimistically , this phase of its challenge will soon peter out going by the rate at which the company is paying its debts . Between 2020 and 2021 its long term loans and borrowings came heavily down to N6.83b from N39.64b while its short term loan followed the same trend as its cascaded to N24.54b from N51.81b.This is significant when viewed from the fact that its finance costs though managed down to N11.07b from N13.50b still wrecked a substantial havoc on its bottom line .Also, its accumulated deferred tax is being settled gradually .No doubt , its Income Tax did the worst damage as its deferred tax led to an increase of 162.1 percent the tax paid in 2021 as the company paid approximately additional N4billion from its N23billion backlog of deferred taxes ; it paid N11.03 billion instead of N7.05b current tax in 2021. Deferred tax expense was N5.01b in 2020 while its total backlog in 2021 was N23.28b against N17.85b in 2020

It was this careful taming of the cost of sales that beefed up the gross profit of the Manufacturer of Guider and Star Lager from N118.69b billion to N250.96 b billion, a rise of 52.7 percent IN 2020 financial year ;in 2021 ,its Gross Profit inched up by 35.2% to N160.41b from N 118.69b . No doubt , doing business in this environment requires a hulk of expenditure whose destructive aim is to shatter an operator’s profits. It is the reason why the company’s operations cost hiked 37.4 percent to N123.55 billion from N89.91b billion. This though is an industry wide phenomenon in a country


Financially speaking, it translated to a 29.7percent rise in the amount of products consumed in the period. That is, its sales swelled from N337.05billion to N437.29billio ,operating activities led to an income N41.49billion from N29.61billion or 40.2 percent increase , Profit Before Tax of N23.70billion from N11.58billion,a 104.7 percent jump and a Profit After Tax of N12.67 billion from N7.37billion or 72.percent increase . Much of the success can be pinned to these initiatives and excellent promotions the company embarked upon in the period

It was, indeed, very herculean to register the above feat. To sell these liquids of pleasure is not always easy for bottlers and brewers as is the case for all manufacturers in this clime. The trend is that the cost for that as represented by the cost of sales on the profit and loss account never goes down. The only direction it travels is northwards. Its Cost of Sales rose by 26.8percent to N276.87billion from N218.36billion; marketing, distribution & admin. expenses hit N123.55b from N89.91b, a 37.4 percent jump. Income Tax did the worst damage as a part of its deferred tax paid led to an increase of 162.1 percent in2021, moving up to N11.03 billion from N4.21b paid in 2020. Furthermore, its finance costs though managed down to N11.07b from N13.50b still wrecked a substantial havoc on its bottom line.

Despite the fleet footed cost of doing business, the company jerked up trading profit by 40.2 percent from N29,61billion to N41.49billion.

Profits at the company rallied as a result, pumping up pretax profit at a rate of 104.7percent to N23.70billion from N11.58billion.This was helped by interest received from the company’s prudent investments in the financial market. There was 72.0 percent improvement to bottom line despite paying more taxes to the government. Net profit shored at N12.67billion from N 7.37billion


  Nigerian Breweries is currently turning this adversity to success as it maintained a steady growth profile. In 2021 financial year, the brewing giant helped more Nigerians to booze more and to survive the increasingly daunting intricacies of life inflicted by deleterious socio-economic environment while helping its beer consumers to reach for greatness as they imbibed more of its brands.

The brewing giant continued its relentless strategies to beat the odds against its moving forward in 2021. Some of its strategies range from driving premium growth with both alcoholic and non-alcoholic premium quality beverages across the nation ,strengthening the core, or mainstream brands ,innovating its beer, driving penetration as well as sustainability at the heart of its business . Specifically , it is driving value growth with Heineken® & Tiger ,leveraging global platforms to connect with young consumers ,engaging consumers with relevant content ,strengthening the core by leveraging regional strongholds with its mainstream brands and rejuvenating leading mainstream brands and supporting its customers with back to bar initiative .Moreover ,its ability to innovate for growth with differentiation in the Malt Category as well as with new beer styles  remains  classical .

Nigerian Breweries has done its bit to remain relevant in the industry right from creating new variants of the existing favoured brands to paying dividends consistently annually for the past few years . All of these had a significant impact on sale even if it hiked the cost of doing business .


In 2021, though its sustained and improved its profitability ,its profit margins were less inspiring while it liquidity position was tight ; this was albeit its ability to manage down its huge debt profile drastically and pay dividends in line with its good tradition

The negative spillover effects of the above could be vividly read from its worsening profit margins driven by its inefficient profit engine  and liquidity metrics driven its cash positions  On  the  face value, one could hurriedly conclude and issue a clean warranty of profitability this brewer going records in the few years , however, beaming a searchlight on its niceties or margins , this conclusion may be a mere mirage    The handsome profits only ensured marginal improvements in profitability or the efficiency in terms of the contribution of turnover to gross profits, pretax and net profits. While the gross profit margin inched up by 36.7 % from 35.2 %, Pretax margins which, is an indicator of how well the company is doing at controlling costs strolled upwards from 3.4 percent to 5.4 percent. That is it made slightly above 5kobo from every one naira of turnover. This means that the 37.4 percent rise in operating costs may be too high for this brewer

The slow-moving pre-tax margin was contagious pinning net profit margin to 2.9 percent compared to 3.4% last year. With a nosedived margin , this represents a loss for the company in a year that inflation remained at double digits.

Meanwhile ,this company continued to face hard challenges on its cash management ability and therefore its liquidity in the period under review as indicated above. Its current assets were N120.167b compared to its current liabilities of N272.53b while current assets were N93.20b compared to its current liabilities of N210.47b in 2020 . By this its current ratio stayed flat 0.44 while its quick ratio declined marginally to 0.21 from 0.27 . This may not be farfetched. Its cash and cash equivalents dropped heavily by 44.9% in 2021 to N16.73b to N30.37b ,its inventories increased by 72.3% to N62.19b from N36.09b while its Trade and other receivables rose by 132% to N26.50b from N11.42b as its Prepayments declined by 23.8% to N2.85b from N3.75b

Its tight liquidity position could be quickly situated on its efforts at re- jigging its debt profile

The worsening cash cycle did impact negatively the company’s liquidity as current ratio sank. This, ostensibly, is because of the recourse to pay back its debts .However ,this impacted positively on its overall financial leverage making it lower than last year because the company succeeded in reducing drastically its loan profile ,a situation that made the company more attractive to investors.

Indeed the company plans to improve facilities as it is committing N59.41billion to investment as opposed to the N37.22billion it invested the year before is another affecting its liquidity . This seems to be a move that investors should be interested in because investment signals improvement and better results on the floor of the Nigerian Stock Exchange. The move itself indicates that the company’s management is a subscriber to the never ending improvement principle.


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