India's largest cement player by capacity — UltraTech Cement — lost over Rs 15,000 crore in market capitalisation on Thursday. The stock fell over 5% in trade after it announced its foray into the cables and wires industry with the development raising a slew of concerns.
India's largest cement player by capacity — UltraTech Cement — lost over Rs 15,000 crore in market capitalisation on Thursday. The stock fell over 5% in trade after it announced its foray into the cables and wires industry with the development raising a slew of concerns.
UltraTech's Cables And Wires Venture
With a Rs 1,800-crore capex plan over the next two years, UltraTech Cement aims to set up a greenfield plant in Gujarat by December 2026, and tap into the growing industry.
This strategic move is meant to add to the construction portfolio the Aditya Birla Group company offers.
Misallocation Of Capital?
The Rs 1,800-crore capex plan for UltraTech's cables and wire foray is low compared to its current Rs 8,000–Rs 9,000 crore capex plan, and is not likely to have an impact on the company's balance sheet strength. There are concerns, though.
Brokerages including Jefferies, JM Financial and Axis Capital state that the company's latest announcement could raise investor concerns on capital allocation.
Citi notes that the venture may hurt the firm's positioning as a pure-play cement company. The company has fairly small contribution from other related segments like readymade cement and construction chemicals, where low capital has been employed. But the new capex plan for the cables and wires industry is relatively more meaningful, states Jefferies.
Ambit Capital states UltraTech Cement has a lot of free cash. The brokerage, however, raised a question: "Why should an investor in UltraTech Cement, who has invested in cement, be saddled with a new industry?"
Does UltraTech Even Have An Advantage?
Brokerages say UltraTech Cement has no right to win strategy in the wire and cable industry, unlike past forays of the Aditya Birla Group.
For context, when the company's parent, Grasim Industries, announced its paints foray — Birla Opus — the company had some distribution overlap between Birla White cement or putty and paints. However, the wire and cable industry has a different network altogether.
However, JM Financial states the company is likely to capitalise on its strong relationships with real estate players in the B2B segment, as well as its distribution reach via UltraTech Building Solutions' 4,400 outlets. The company could also gain some advantage for key raw materials like copper and aluminium from another group company — Hindalco Industries.
Dilemma On Which Segment To Enter
The cables and wire industry as a whole has reported a revenue compounded annual growth rate of 13% between fiscals 2019 and 2024. However, the cables segment has seen better demand, while the wire segment has not.
If UltraTech Cement was to enter the cables segment, the product development, manufacturing, etc, would take 2 to 2.5 years, as per analysts. Further, the sector also requires a lot of client approvals, which is a lengthy process.
The wire segment, on the other hand, is easier to enter, as per Citi.
Weighing Revenue Potential
JM Financial notes that the cable industry generally has an asset turnover of 4 to 5 times and an Ebitda margin of 10–12%. At full ramp up, this would lead to a 4–5% Ebitda accretion for the company's FY27 Ebitda estimates. As per Jefferies, the segment could amount to 10–12% and 6–9% of the company's revenue and Ebitda, respectively.
Ambit Capital seconds the estimates. Even if UltraTech Cement manages to generate revenue of Rs 10,000 crore and an Ebitda of Rs 1,000 crore from the wire and cable business in 3–5 years, it would still account for just 5% of the company's estimated consolidated Ebitda at the time.
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