Operating costs swallow firms’ profits — analysts

A WAVE of private-sector unbundling, subsidiary disposals and corporate restructuring saved companies from collapsing or reducing capacity utilisation significantly this year, economic analysts have said.

With the inflation tide gone and the nudity of many companies now visible analysts this week said financial results announced this year showed that while dollarisation had improved companies’ operations there was not much profit recorded during companies interim and year-end financial results.

Analysts said companies’ cost efficiencies were still “poor” with some firms still in need of restructuring their operations to become cost effective by disposing of non-core investments.

“Restructuring, unbundling and disposing non performing subsidiaries boosted some companies operations. Despite capacity utilisation and sales revenues picking up, money generated as revenue (by companies) was all being used to pay operating costs,” Economist John Roberson said.

“During the Zim-dollar era costs were sub-inflationary but right now they are real and in most cases way above those obtaining in other countries,” he said.

Economic analyst Eric Bloch however says he did not believe that any sector’s company results were materially exposed negatively by results being announced in US dollars.

“Such results as were negative were almost wholly driven by the adverse economic circumstances, impinging upon companies’ operations. Over and above inadequate liquidity, and erratic power supplies, key negative influences on performance of companies include, after-shock effects of 2008’s hyperinflation, which continues to minimise consumer purchasing power,” said Bloch.

Bloch says massive competition from imported products, including those whose price competitiveness was facilitated by huge export subsidies given by supplier countries, and vast volumes benefitting from customs duties preferences by falsified or disguised alleged Sadc origin, and extensive cross-border smuggling.

“All companies and sectors are benefitting from dollarisation to the extent that inflation has been contained, albeit not reversed, and by the substantial elimination of the illegal parallel currency markets,” Bloch said.

Farayi Dyirakumunda an economist and executive director at African Investment Markets said the introduction of US dollars and the multi-currency monetary system had lowered financial and currency risk associated with the Zimbabwean dollar era and has been the anchor and platform on which the economic revival was hinged upon.

“This has benefited companies across all sectors of the economy. Initially with greater spending income the retail sector has been the first sector to surge as consumer propensity to consume food and clothing items is higher in the basket of goods,” he told businessdigest on Tuesday.

Pan-African financial services group, Imara, said doing business had become considerably easier under dollarisation and good management would quickly spot any inefficiency in business models and take appropriate action.

“Many business models in Zimbabwe simply do not work in the new dollarised and competitive environment, but managed to get by in a less competitive and inflationary environment. Such companies could well be those whose models were built on import-substitution products,” said Imara
According to the Confederation of Zimbabwe Industries (CZI) Industrial capacity utilisation rose by 11% to an average 43,7% in the 12 months to June this year, owing to a stable business environment. CZI said capacity utilisation at individual company level varied from 30% to levels above 74%.

Economist Brains Muchemwa on Tuesday told businessdigest  there were many opportunities for group companies to unbundle a division (or divisions) that has little synergy with the core business of the group.

“Most companies need money for working capital or long-term capital investment, it will often make sense for them to restructure or unbundle. Shareholders will need to accept dilution if their businesses are to grow significantly from current levels through capital expansion. Rather have a smaller share of a much bigger pie,” he said.

Muchemwa said contrary to the erroneous national anthem that talks of Zimbabwe having skilled labour force, the country is suffering from skills deficiency, a strategic issue that needs redress by most corporates.

“Indeed the results of some listed companies are showing clear signs of over-trading, a clear sign of incompetent management and board of directors,” he said.

While capacity utilisation was increasing, analysts said it was important for government to come up with polices that protect local industries and consumers.

According to a report by Kingdom Stockbrokers (KSB), government has to come up with policies to protect local industries.

“This means that the local business sector will have to be competitive enough to stay in business, a situation which is very unlikely given the decade-long de-industrialisation that has, hitherto, been taking place in Zimbabwe,” KSB said.

KSB said price differentials between South Africa and Zimbabwe outside such costs as transport, insurance and reasonable mark-ups had resulted to people going direct to shop in South Africa.

KSB said government will have to come up with some mechanism to prop up local industries.

“In the medium to long-term, however, government will have to implement interventionist policies to prop up and protect local industries with high tariff walls within the framework of the infant industry argument,” KSB said.

“Now to continue exposing local companies, with their attended high cost and inefficient production structures, to highly efficient and low cost South African competition is tantamount to perpetuating the decade long de-industrialisation,” KSB warned.

Economic analyst, Sonny Mabheju told businessdigest on Tuesday that dollarization had eliminated hyperinflation and the volatile exchange rate regime the country had operated in for a number of years.

 

Paul Nyakazeya

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