In the realm of corporate strategy, the pursuit of cost optimization stands as a pivotal endeavor, particularly in industries susceptible to fluctuating economic conditions.
Dangote Cement, Africa’s leading cement producer, stands as a notable player in this landscape. With its formidable presence and influence across the continent, the effectiveness of its cost optimization measures holds profound implications not only for its own bottom line but also for the broader cement industry.
In this context, Dangote Cement has focused on addressing the challenges posed by the rising fuel and power consumption expenses, compounded by material consumption, heightened interest rates, and foreign exchange losses due to Naira devaluation.
Attesting to this commitment, the company stated in its 2023 FY and Q1 2024 earnings release reports that it has Commissioned 10 of the 17 Alternative Fuel Projects across the Group.
However, given the company’s declining profit margins and the factors driving this trend, it appears that despite the initiatives and strategies implemented, there hasn’t been the desired immediate impact. Although, these efforts may still hold the potential for long-term gains.
In a competitive landscape, profit margins serve as a critical barometer for assessing a company’s operational efficiency
No doubt, the company has showcased resilience and consistency in growing revenue and profit amidst a challenging environment. Its recently released Q1 2024 results show strong financial performance.
Arvind Pathak, Chief Executive Officer, commenting on the results said: “Despite facing elevated cost pressures, increased borrowing costs, and further currency weakening, our first-quarter results underscore our dedication to effectively navigating challenges. Group revenue more than doubled to ₦817.4B, while Group EBITDA rose 66.6% to ₦309.5B. PAT was up 2.9% at ₦112.7B.”
Although the Q1 2024 results showed profit growth, the rise in profit did not keep pace with revenue growth, resulting in a contraction of profit margins to 13.79%.
This mirrors a comparable pattern observed in the 2023 fiscal year.
During that period, despite a notable 19.17% year-on-year increase in profit after tax to N455.583 billion, the growth in profit failed to match revenue growth, leading to a decline in margin to 20.63%, marking its lowest point in five years.
Although a net profit margin exceeding 20% might seem healthy, the downward trajectory suggests a significant narrative.
A cursory review of Dangote Cement’s financial statements reveals that the company has been contending with escalating operational expenses, particularly in material consumption and fuel and power consumption, alongside increased interest expenses and losses from fluctuations in foreign exchange rates.
Specifically, material consumed and fuel and power consumption, which constitute on average 67% of cost of sales, have continued to surge. In 2023, they surged by 46%, surpassing their five-year compound annual growth rate (CAGR) of 30%. This trend has persisted into 2024.
- Despite the company’s expressed intention to explore alternative fuels and implement a cost-containment strategy after spending approximately N56 billion on fuel and power consumption in Q1 2023, the expenses still soared to N399.205 billion in 2023
- Furthermore, in Q1 2024, while fuel and power consumption surged by 221% to N181.866 billion, material consumed grew by 104% to N98.204 billion, both nearing 42% of the 2023 full-year figure.
This suggests a considerable escalation in costs within the specified categories during these periods.
Dangote Cement is moderately leveraged going by its leverage ratios. It is plausible that the low net profit margin is offsetting the effects of financial leverage on ROE.
Higher financial leverage typically amplifies ROE through increased earnings from equity. However, if the company’s profitability is low, as indicated by the net profit margin, it can dampen the impact of financial leverage on ROE
The continued escalation of these costs would continue to impinge on the net profit margin and consequently the return on equity (Q1 2024: 5%), which is very important for shareholders’ and investors’ confidence.
Dangote Cement currently is the most capitalized stock on NGX. Witnessing a significant surge in its share price, the company has demonstrated impressive performance, transitioning from a modest 23% year-to-date gain in 2023 to an impressive 105% year-to-date gain as of the last trading session on Friday, May 3, 2024.
For the last decade, the company has consistently distributed dividends to its shareholders. In 2023, it raised its DPS from N20 in the 2022 fiscal year to N30, resulting in a yield of 9.38% and a total return of 115%, ranking among the top performers on the NGX.
Analysts expect the company to achieve earnings per share of N37.41 in 2024. With investors valuing the company at N4.21 for every Naira of sales based on its trailing twelve-month price-to-sales ratio of 4.21x, there’s a notable expectation for profitability growth.
However, the imperative for the company lies in effectively containing its costs in absolute terms to ensure sustained financial health, operational efficiency and profitability.
