Cable Stocks Erode Rs 30,000 Crore In Market Cap On UltraTech's Foray Into The Sector
UltraTech's board has approved a capital expenditure of Rs 1,800 crore over the next two years for the company's foray into the market.
UltraTech Cement Ltd.'s announcement of its entry into the wires and cables segment has eroded roughly Rs 30,000 crore for the listed wires and cable players on Thursday.
At market close, KEI Industries Ltd. was down over 21%, while stocks like Polycab India Ltd. and RR Kabel Ltd. were down 19% each. This negative reaction of the stocks might also be co-related to Aditya Birla Group's entry into the paints space with Birla Opus. More than increased competitive intensity, the valuation re-rating has impacted all companies.
Foray
UltraTech's board has approved a capital expenditure 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.
The stock can be down on Thursday due to investments in unrelated business segments and the entry will not be easier said than done.
The customer base is similar for wires and cables to that for cement, but the distribution channel of sales is different barring few overlaps. While the key influencer for wires is the electrician, it is the contractor for cement. Distributor/dealer for wire and cable is a hardware store, not the typical cement dealer, according to Ambit Capital.
Currently, UltraTech operates 3,500–4,000-odd Ultratech Building Solutions stores. While there might be some overlap, it will have to build an entire brand and distribution network for cables, the brokerage added.
Market Size
India's wire and cable industry's current market size is Rs 80,000 crore, out of this Rs 25,000 crore is wires and the remaining Rs 55,000 crore is cables. The cabling business is driven by tenders, mainly from power transmission/distribution companies and, hence, cabling will be an even tougher nut to crack, according to Ambit.
However, the total size of the building wire market is Rs 25,000 crore and it is expected that UltraTech can address this market first. This has presence from RR Kabel, Havells India Ltd., Finolex Cables Ltd. and Polycab among listed peers, with industry leader Polycab at around Rs 7,000 crore.
With the strategy to be an integrated building solutions provider with cements, paints and now wires and cables, UltraTech can be on track to achieve it, according to brokerages.
Investment Vehicle
Currently, Birla Opus, the paints venture of the Birla Group, is housed under its other listed entity, Grasim Industries. While plans to invest Rs 10,000 crore in Birla Opus by fiscal 2027 continue, another new venture will strain the financials of the business and, hence, UltraTech's current leverage at less than 1x will be one of the deciding factors for the group.
But this business might take some time to take off. With plants getting operationalised by December 2026, the company will have to build a dedicated distribution network for the wires and cables business.
Ambit said it is equally even more questionable to use UltraTech as a vehicle for this as there is little overlap on either manufacturing or distribution
Incidentally, Hindalco Industries acquired CC rod plant Ryker from Polycab in 2021, as Polycab wanted to focus on its core wires and cables business. CC rod is the primary raw material for copper wire and cable industry. Currently, Hindalco is itself investing $10–11 billion over the next few years and, hence, that could be another reason to not house this new business under Hindalco.
Revenue Potential
Ambit estimates UltraTech could target annual revenue of Rs 5,000–7,000 crore and earnings before interest, taxes, depreciation and amortisation of Rs 400–800 crore from this investment in three–five years.
Prima-facie, assuming an asset turnover of four–five times and an Ebitda margin of 10–12%, this segment can amount to 10–12%/6–9% of the revenue/Ebitda of the current fiscal's estimate, according to Jefferies.
The cables business is a tougher nut to crack, Equirus said as the brokerage firm provided three key scenarios depending on the business strategy. First, where 100% of the investments is in the wires segment, the second scenario is having a 50% share in each and lastly, a complete revenue from the cables business.
Buy the Dip?
As evident with Birla Opus' entry into paints, despite no meaningful revenue accretion currently, the market fragmentation hurts sentiment. Hence, while the valuation premium might be correcting in the price on Thursday, some more pain might be in the offing.
Motilal Oswal expects a mild negative reaction for UltraTech as seen in trade. However, cable and wire players may experience a de-rating in valuation multiples and a de-rating in their valuation multiples due to the entry of a sizable player.
It cut the target price of Polycab to Rs 6,950 apiece from Rs 8,380 and for KEI, it was cut to Rs 4,000 apiece versus earlier of Rs 4,780.
