UltraTech Cement Ltd’s choice to enter the cables & wires (C&W) trade has triggered 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. It is usually doubtless that valuations of some shares have 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 lately, weighing on valuation multiples of incumbents. UltraTech’s capex for the C&W endeavour is ₹1,800 crore over the subsequent two years. It is going to arrange a plant close to Bharuch in Gujarat, which is anticipated to be commissioned by December 2026.
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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 is not going to 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 greater multiples than C&W firms, which have skilled a number of re-rating prior 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.
Certain, the C&W trade is fragmented (in contrast to paints, which is an oligopoly), which might make market-share beneficial properties troublesome. 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 threat
Nonetheless, UltraTech’s entry into C&W will improve 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.
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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 could 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 might be value about ₹1.3 trillion by FY29. On an trade foundation, segments corresponding to energy transmission and industrial cables are prone to require two to 4 years for prequalification, Jefferies stated.
However, gross sales within the residential phase might doubtlessly start instantly. Thus, Jefferies forecasts that the aggressive impression on Polycab could possibly 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 corresponding to Finolex or Havells could possibly be greater.
UltraTech inventory slumps
To make sure, UltraTech’s buyers don’t appear thrilled – the inventory fell by about 5% on Thursday. However the enchantment of the sturdy progress 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 might be in cement or the development worth chain. This uncertainty could dissuade buyers who solely need publicity to the cement sector.
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