Mumbai: Lafarge SA of France, the world’s largest cement company by volume, is planning to nearly double the revenue contribution of its Indian subsidiary to 8% over the next three-five years, said a senior executive of Lafarge India Ltd. The Indian outfit will acquire other firms and build new plants to meet the target.
“The growth in India will be a combination of fresh capacities and acquisitions, and we will follow a multi-product strategy to get closer to the customer,” said Uday Khanna, managing director and chief executive of Lafarge India.
Expansion mode: Lafarge India chief executive Uday Khanna. Kedar Bhat / Mint
The firm’s expansion plans come at a time when the Union government has announced it will invest about $500 billion (Rs24.7 trillion) to build the country’s infrastructure over the next five years.
The focus on India, China, West Asia and the Mediterranean region is part of Lafarge SA’s strategy to generate 65% of profits from emerging markets by 2010.
In the first quarter ended March, Lafarge SA’s sales from Western Europe fell 26%, North America 19%, Central and Eastern Europe 45% and Latin America 11%, while West Asia sales grew 58%, Africa 13% and Asia 19%.
“Organic expansion by definition is slow. It takes an average 18 months to get approvals before we can build a plant and sometimes it is difficult to estimate this time,” Khanna said. His acquisition plan for capacity addition also has a rider—“the presence of willing sellers”.
The immediate plan, Khanna said, is for Lafarge India to raise its cement capacity to at least 20 million tonnes (mt). By 2012, Lafarge will have 12 mt capacity, through fresh capacities and possible acquisitions, from the current level of 5.5 mt. At this, Lafarge India’s market share is about 2.75%.
Grasim Industries Ltd and UltraTech Cement Ltd of the Aditya Birla Group now account for 40% of the cement production in the country.
Lafarge SA alone makes 200 mt of cement annually, the same that the entire Indian cement industry produces.
“We have an internal team that is always looking at acquisitions,” said Khanna, but added that the price that Holcim Ltd, the world’s second largest cement producer, paid to acquire a controlling stake in Gujarat Ambuja Cement Ltd, or GACL, India’s third largest cement firm, has been high and that sellers see this number as a benchmark.
Lafarge India has no other option but to grow through acquisitions, said a cement industry analyst with a domestic brokerage, based in Mumbai. He did not want to be identified as he is not authorized to speak to media. “The company’s fresh capacity will come to stream only by 2012 and so it has to look for acquisitions to grow faster,” he added.
In fact, Lafarge’s entry into the Indian market was through the acquisition route. In 1998, it acquired Tata Steel Ltd’s 1.8 mt cement business for Rs550 crore, and four years later followed this up by acquiring a 2.2 mt plant from Raymond Ltd for Rs786 crore.
While Lafarge has since curbed its acquisitive trait, rival Swiss firm Holcim in 2006 bought ACC Ltd, and GACL, adding 40 mt to its capacity.
“We lost the early advantage when Holcim came and acquired ACC and Gujarat Ambuja,” conceded Khanna, who joined Lafarge in France in 2003 as senior vice-president (group strategy) and has been in charge of the India operations since 2005.
Even now, said the cement sector analyst mentioned earlier, most larger-capacity plants have been snapped up and Lafarge India will have to look at plants with smaller capacities and pay a premium for those.
“It was a question of timing and the twin-deal for Holcim,” said a former managing director of a cement firm. Lafarge India will always be “(only) one of the producers” in India because of the way it had chosen to grow in India over a decade, said this executive who is not associated with the cement industry now and who did not want to be identified.
Even medium-sized Shree Cements Ltd has expanded its capacity to 10 mt in five years and Jaiprakash Associates Ltd has set a target of 20 mt in a few years, this person said.
Khanna said Lafarge India would also grow the ready mix concrete business it bought from Larsen and Toubro Ltd in 2008 for Rs1,480 crore, as well as its gypsum business, which it has built up to 1 mt capacity.
He also did not rule out a listing on the Indian bourses in the future. The firm has issued employee stock options to at least 50 employees, or 10% of its workforce in India.
Lafarge SA currently holds 95% in Lafarge India; the remainder is held by Housing Development Finance Corp. Ltd, India’s largest mortgage lender.
In India, the market capitalization of the top five listed cement companies—Ambuja Cements Ltd, ACC, UltraTech Cement, Shree Cement Ltd and India Cements Ltd—have grown 75% to date in calendar 2009. Shree Cement has seen a 161% increase in its market capitalization in this period.
Lafarge’s focus on India is also signalled by the fact that its global chairman and chief executive officer Bruno Lafont sits on the board of the India firm, making it one of only three global subsidiary boards that he is on.
Lafarge India’s current priority is to expand though fresh plants in Himachal Pradesh, Rajasthan and Meghalaya that will feed the fastest growing northern Indian market and in Gulbarga which will supply cement to the south western coastal market.
“We want to systematically move to the non-eastern market and not in a haphazard manner,” Khanna said, adding that the Indian business wants to grow organically from 5.5 mt a year to 12 mt by 2012. “We need to build capacities at the lowest cost.”