UltraTech Will No Longer Be Just A Cement Company
The company plans to enter the cable and wires industry which has achieves a revenue CAGR of 13% over FY19-24
India's largest cement company by installed capacity- UltraTech Cement Ltd announced its foray into the 'cables and wires' business on Tuesday.
The company plans to spend a total of Rs 1800 crore for this venture.
UltraTech's Foray Into Cables & Wires
UltraTech Cement's board has approved a capex of Rs 1,800 crore over the next two years for the company’s foray into the market. The company plans to set up a plant in Bharuch, Gujarat. The expected commissioning date for the plant is earmarked for December 2026, and the company plans to leverage its connection with end customers to gain a share of the customers’ wallet.
Rational Behind The Investment
As per the company's Chairman Kumar Mangalam Birla, the venture aims to expand UltraTech's presence in the construction value chain. The company, in its press release, stated that it aims to meet the growing demand for cables and wires across various sectors like residential, commercial, infrastructure, and industrial applications.
It also noted how the cables and cables industry has achieved a revenue compounded annual growth rate of 13% between FY19 and FY24 due to the migration of the industry from the unorganised to the organised market.
Financial Impact
If one has to look at the financial impact for the company, the average industry asset turnover stands at 4-5x times. Assuming a 4.5 times asset turnover ratio, the revenue potential of the investment stands at Rs 8100 crore.
The industry also operates at an Ebitda margin between low to mid-teens. Assuming a 10% margin, the potential Ebitda for this business could be around Rs 810 crore, which is 4% of the FY27 consolidated consensus Ebitda estimate of the company as per Bloomberg.
As per Citi Research, which assumes a revenue-to-gross-block multiplier of 7 times for the wires and cables industry, the estimated revenue potential of the business stands at Rs 1200 crore, which accounts for 14% of the brokerage's FY27 revenue estimates for the company.
What Does The Investment Mean For UltraTech
The cement maker plans to spend a total of Rs 1,800 crore in capex for its latest venture. This compares to the company's current capex plan of Rs 8,000-9,000 crore and operating cash flow of Rs 10,000 crore.
In terms of raw material sourcing, distribution, and transportation, the synergies are negligible. The only synergy from the Birla Group as a whole could be from Hindalco Industries, which is a maker of copper and aluminium, a key raw material for the cable and wire business. Even in terms of distribution or selling point of contacts, UltraTech Cement distributes its cement to contractors, while cables and wires are done via electricians.
Analysts' View
As per Citi Research, the foray could hurt UltraTech's positioning as a pure play cement company.
Brokerages like JM Financial, Axis Capital and Jefferies all concur the view that UltraTech's investment into a non-cement or unrelated line of business could raise investor concerns over capital allocation.
Cables Or Wires: Which Is A Better Investment
As per Citi's research analyst Ashish Kanodia, for any new players and distributors, a better investment would be into the wires business. This is due to the expected gross block multiples for the two segments. Kanodia notes that for a greenfield capex project, the gross block for the cables business turns 3 to 4 times, while that for the wires business turns 8 to 10 times. This means that for every rupee invested in the wire segment, the total value of the assets is expected to be 8-10 times that amount.
Furthermore, cables usually take two to two and a half years in terms of product development, manufacturing, product certifications and client approvals. While wires take a lower time period for market entry, higher brand recall of UltraTech Cement could help.
However, it is key to note that, due to the expectations of strong demand for cables in the medium to long term, a majority of capex is likely to be towards cables. This is because the demand for wires has been relatively weak and capacity utilisation has been low.
Impact On Cable & Wire Industry
The top 7 listed players in the cables and wires industry in India are Polycab India, KEI Industries, Havells, Finolex Cables, RR Kabel, Universal Cables, and Paramount Cables. The total gross block of these companies—which is the total historical cost of a company's fixed assets before depreciation—stands at around Rs 8200 crore.
UltraTech's Rs 1,800 crore investment is 22% of this total.
Some analysts also note that the company's entry could also hurt the industry's Ebitda pool, impacting margins of other peers—just like we saw in the paint industry—when Grasim Industries announced its entry. Currently the Ebitda margins of the top two players, Polycab India and KEI Industries, stand between 10% and 13% respectively.
Furthermore, no clear or proven right-to-win strategy in the industry can also indicate a possibility of a price war.
However, UltraTech's entry is unlikely to have any impact on FY25–28 earnings of the current cable and wire players, according to Nomura. But, the brokerage will be watching out for any top-up announcements by the company to watch out for longer term impact on the sector's demand and supply scenario.
