UltraTech Cement Ltd’s choice to enter the cables & wires (C&W) trade has induced jitters throughout shares within the sector on fears of heightened competitors. Shares of Polycab India Ltd, KEI Industries Ltd, Havells India Ltd, RR Kabel Ltd and Finolex Cables Ltd fell by 5% to twenty% on Thursday. Additionally it is probably that valuations of some shares had been steep to start with and simply wanted a set off.
A major concern is that the C&W sector might have the same destiny to that of the paints trade, which has seen new firms enter in recent times, weighing on valuation multiples of incumbents. UltraTech’s capex for the C&W endeavour is ₹1,800 crore over the subsequent two years. It’ll arrange a plant close to Bharuch in Gujarat, which is anticipated to be commissioned by December 2026.
Additionally learn: Cyient’s earnings revival distant whilst new CEO announcement is constructive
As such, the impression on the profitability of C&W firms is anticipated to be nil within the near-to-medium time period. “Whereas the earnings of C&W firms won’t be impacted till the plant is commissioned, a number of erosion might happen earlier (in contrast to with paints firms, the place this occurred after the commissioning of Grasim’s plant),” stated a Motilal Oswal Monetary Companies report dated 27 February. “Moreover, paints firms have traditionally traded at increased multiples than C&W firms, which have skilled a number of re-rating up to now few years,” it added.
Grasim launched its paints model within the March 2024 quarter, greater than two years after it entered the paints enterprise in January 2021 with an preliminary funding of ₹5,000 crore, which was later doubled.
Positive, the C&W trade is fragmented (in contrast to paints, which is an oligopoly), which might make market-share good points tough. Plus, “Distribution channel needs to be largely constructed afresh for wires (versus some overlap in cement-paints case with white cement presence),” stated Nuvama Analysis.
Overcapacity danger
Nonetheless, UltraTech’s entry into C&W will enhance competitors, particularly at a time when firms are including capability, leaving them open to the danger of overcapacity. Furthermore, even when demand stays sturdy, the impression on revenue margins stays to be seen, particularly if UltraTech adopts aggressive pricing.
Additionally learn: 360 ONE’s B&Ok deal could slender its valuation premium over Nuvama Wealth
The scaling up of revenues for UltraTech will hinge on the tempo at which it ramps up manufacturing and distribution. There’s scope for the corporate to realize share from unorganised companies. “Assuming 4-5x asset turnover, Ultratech’s income potential will be estimated at 5-7% of the C&W trade in FY29 (estimated),” stated Jefferies India analysts in a report on 26 February. The broking agency estimates the general C&W trade will likely be price about ₹1.3 trillion by FY29. On an trade foundation, segments equivalent to energy transmission and industrial cables are more likely to require two to 4 years for prequalification, Jefferies stated.
However, gross sales within the residential section might probably start instantly. Thus, Jefferies forecasts that the aggressive impression on Polycab may very well be decrease, as 65-70% of its gross sales combine is cables (business-to-business). However, the impression on housing wires/business-to-consumer gamers equivalent to Finolex or Havells may very well be increased.
UltraTech inventory slumps
To make certain, UltraTech’s traders don’t appear thrilled – the inventory fell by about 5% on Thursday. However the attraction of the sturdy development and return profile of India’s C&W sector, the event additionally attracts consideration to UltraTech’s capital allocation.
Little doubt the proposed capex is comparatively small for the corporate—about 10% of its annual capex steering. However this might create uncertainty on whether or not incremental capital allocation will likely be in cement or the development worth chain. This uncertainty could dissuade traders who solely need publicity to the cement sector.
Additionally learn | Trumped: FIIs abandon Asian equities, unnerved by US tariffs, stronger greenback
