Lafarge India, the Indian subsidiary of world?s largest cement maker Lafarge, dwarfed by its rivals? capacity in India, plans to tap the building materials market with a new strategy.
The company is looking for Indian partners to develop and research on cost-effective ways of building. The company, which primarily sells cement in eastern India, had formed a partnership, unique to such companies, with the Indian Institute of Technology or IIT, Madras, to jointly research on the durability and long term performance of concrete for buildings.
?IIT Madras will assess the durability of the concrete we develop. This will help build confidence in the market,? Pascal Casanova, group senior vice-president, research and development, said. ?The industry is sometimes a bit conservative, so it is to show them that the product will last long,? he added.
The company and IIT Madras will build a laboratory, which will help the engineering institute to research. Lafarge has invested around R60 lakh in the laboratory, Casanova said. Lafarge also plans to work with other universities on common projects. ?These would be universities where they have the equipment and we agree that they work on topics with us or for us,? he added.
Casanova did not name the partners the company is talking to, but said Lafarge will look to develop building materials typically Indian or can prove efficient in tropical countries to build homes. ?We are learning from the existing experience and then from this learning we will see how we can improve it further with our innovations,? the R&D official said. The aggregates and concrete division contributes 32% to Lafarge?s global sales.
Lafarge is not new in choosing a different strategy unlike its rivals Holcim and UltraTech, owned by billionaire Kumar Mangalam Birla. Rather than betting on a commodity like cement, the French subsidiary took a bet on ready mix concrete delivered at the construction site. The company purchased L&T?s RMC business for R1,480 crore in 2008 with a pan India presence.
?There could be a long way to go for Lafarge as the ready-made concrete business is still at a nascent stage in the country,? an analyst from a domestic brokerage said. He or his firm cannot be quoted as they do not analyse unlisted companies. ?Since cement sales are low in the country, Lafarge might not earn profits by selling just cement. But if that is converted into ready mix concrete (RMC), they might be able to sell additional volume,? he added.
?The market for ready mix concrete has not yet developed in India,? another analyst from a domestic brokerage said on condition of anonymity. ?The requirement for such product is only there where there is large housing and construction activity planned, say in cities such as Mumbai. Even if you take road projects, government is not looking at too many concrete roads,? he added.
The French cement maker failed to expand its capacity beyond 7 mt in the past decade, while both domestic and international rivals forged ahead by purchasing cement companies. Lafarge purchased Tata Steel?s 1.8 mt cement plant in 1999 and later a 2.2 mt from apparel maker Raymond in eastern India. Holcim, the second largest cement company, owns nearly 40 mt from its two acquisitions in 2005, a 16 mt from Associated Cement Companies and Gujarat Ambuja Cements. Ultra Tech, owned by billionaire Kumar Mangalam Birla, controls 52 mt through a series of acquisitions in India and abroad.
But, Lafarge continues to focus on innovative products to expand in India.
Lafarge will look at innovating the usage of waste in construction. In India, most plants use coal for power generation which means there is lot of fly ash generated as waste,? Casanova said. ?The fly ash can be used in cement or concrete. We could also try to produce aggregates with such waste,? he added.
Lafarge is looking to focus at affordable housing specifically in India and would concentrate its research on how to reduce cost of construction to enable better affordable houses in the country. ?We are trying to understand ways of construction in rural areas India, too, as they deal with very different climates,? Casanova said and added, ?In terms of efficiency building, since it is a large tropical climate country, you don?t built the same way as Europe or America, and these are things we would be looking at for our research.?
The cumulative operating profit margin of the seven cement companies covered by broking firm Sharekhan expanded by 223 basis points to 25.9% in Q1 FY12, according to an August 2011 report. The margin expansion came on the back of a surge in the realisation which offset the cost pressure due to increase in power and fuel cost and higher freight cost , the report said.