Cables & Wires sector braces for UltraTech Cement’s big entry

According to Motilal Oswal, this entry, along with the Aditya Birla Group's intention to become a significant player in the segments where they operate into could pose a threat to the valuation multiples of C&W companies. As a result, while the earnings of C&W companies will not be impacted until the plant is commissioned, multiple erosion in the stocks could occur earlier.

Currently, there is a significant divergence in the C&W industry, where no one player commands a market share of over 20 percent in either segment. "The industry comprises nearly 400 players, ranging from SMEs to large enterprises, with revenue between Rs 50 crore and Rs 400 crore.  The industry is, therefore, ideal for a new entrant with deep pockets," JM Financial noted.

What can work for UltraTech Cement's C&W foray?

• According to JM Financial, raw materials such as copper and aluminium account for 70-76 percent of the total cost in the C&W segment. UltraTech Cement, with direct access to Hindalco and Birla Copper (as they are all part of the Aditya Birla Group), will enjoy assured supply and cost advantage that will allow it to price its products competitively without any significant impact on margins.


• UltraTech Cement's connect with real estate developers due to its cement business can prove to be an advantage. "As wires are also used by large real estate developers, there is scope to enter B2B markets. We also model Ultratech to focus more on wires than cables," noted ICICI Securities.


• Further, even individual home builders will look towards one of the 4,400 UltraTech Building Solutions (UBS) stores for building products across India, positioning the company well to capture the growth of the domestic wire business.

• Most market players see UltraTech Cement as a pure-play cement firm. This has partly resulted in the stock seeing the sharpest fall in three years in trade on February 27. ICICI Securities said, "We do not model any material synergy benefits in both the businesses. We believe the raw materials are different and transportation/freight channel too are different. Electricians are influencers in cables and wires, whereas masons and contractors influence the decision of cement buying; the distribution channel is different too."

• Domestic brokerage Nuvama Institutional Equities stated, "Cables need approvals from several customers across different user industries such as railways, oil & gas, solar, along with agencies that may take six-24 months, depending on SKUs, post-commissioning of the plant." However, on the flip side, Motilal Oswal stated, "While securing these approvals may be time-consuming, we believe it will not be a daunting task for the company."

• In a note, Citi said the company’s net debt is currently Rs 16,200 crore, and the Rs 1,800-crore investment is expected to cut free cash flow by 13 percent over two years.

Motilal Oswal downgraded its rating on KEI Industries and RR Kabel to 'neutral', from its earlier 'buy' tag, while retaining its 'buy' call for Polycab India shares and 'neutral' for Havells India stock. On the flip side, Nuvama Institutional Equities retained its bullish stance on KEI Industries, Polycab India and Havells India shares.

What's the path forward for UltraTech Cement?

The views remain sharply mixed. According to Nuvama, the entry of UltraTech Cement into the C&W segment is unlikely to have any impact on FY25–28 earnings of C&W players. Further, the industry has significant growth opportunity in exports and hence some players may be able to divert capacities, thus further limiting the impact of such new additions.

"This entry shall have a modest impact on C&W industry volume/margins in the medium term. We believe this shall further drive unorganised to organised market share (organised share is likelyto have gone up from 68 percent in FY19 to 73 percent in FY24) while creating further healthy
competition among organised players," added Nuvama Institutional Equities.

However, JM Financial said, "The revenue scale-up will depend upon how fast the company is able to ramp up its manufacturing and distribution. At full scale revenue, and based on industry growth expectations, UltraTech Cement could possibly garner a 5 percent market share by FY28 in the W&C industry, and even a double-digit share in the wires segment alone."

While there will be no change in earnings estimates for C&W companies over the next two years, there could be a de-rating in their valuation multiples due to the entry of a sizeable player, as per Motilal Oswal. The brokerage added that the C&W business also appears to be highly competitive, with margins lower than UltraTech Cement's existing business. Additionally, the company’s strategy of entering the distribution channel needs to be observed.

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