With UltraTech Cement announcing its foray into the Cables and Wires (C&W) industry with a planned capex outlay of Rs 18 billion over the next 2 years, brokerage firms and analysts maintained that the move will have only a modest impact on the segment and on sector players. An analysis report by Nuvama stated, “Given C&W industry is likely to sustain strong 13 per cent CAGR (similar to FY19–24) and emerging opportunities in exports, entry of UltraTech may have only a modest impact, at best, in FY28 or onwards (less than 5 per cent of the total industry then), in our opinion.” This, it added, is on account of i) fragmented nature of C&W industry (largest player has less than 18 per cent market share); ii) distribution nuances; and iii) approvals for cables.
UltraTech Cement board has announced a planned capex outlay of Rs 18 billion over the next two years which is expected to be financed through a mix of internal accruals and debt. The plant will be set up near Bharuch, Gujarat, and the company aims to commission it by Dec’26. JM Financial said, “On full ramp-up, we estimate potential EBITDA accretion of 4-5 per cent on FY27E EBITDA base. Given the group’s growth ambitions and UltraTech’s robust cashflow generation, we also don’t rule out the possibility of the group entering into other building solution segments in future.” Even as the capex intensity is low and unlikely to stretch the balance sheet, the investment into a non-cement business is likely to raise concerns over capital allocation.
Though capex intensity is low and unlikely to stretch the balance sheet, JM Financial said that the investment into a non-cement business is likely to raise concerns over capital allocation. However, it stayed positive on the company and its “return ratios are poised to improve structurally over the next 3-4 years owing to i) rising asset turnover; ii) low cost of expansions; and iii) rising profitability”.
Through this foray, UltraTech aims to meet the growing demand for wires and cables across various sectors, including residential, commercial, infrastructure, and industrial applications.
What it means for C&W industry?
The Indian C&W industry stood at Rs 800 billion (FY24), posting a CAGR of around 9 per cent over FY14-24, which was 1.5x of the GDP growth and Motilal Oswal Financial Services (MOFSL) maintained that the industry continues to expand, given the growing demand for electricity and power infrastructure, the rapid growth of renewable energy, the real estate upcycle, the growth of telecom, the rise of data centers, mobility, smart cities, and rapid urbanization. “As per estimates, the C&W industry is estimated to grow in the mid-teens over the next five years, it said while maintaining that the industry remains relatively organized, with branded players making up around 74 per cent of the industry, which is expected to further increase to approximately 80 per cent by FY27.
With UltraTech’s entry into the segment, Nuvama said, “We estimate C&W industry is heading for a balanced demand-supply scenario over the next three–four years based on publicly announced capex by leading players and 13 per cent CAGR in industry revenue. Secondly, assuming 60-70 per cent CU in year 3 (as it builds distribution for wires and secures approvals on various cables SKUs), it will be less than 5 per cent of the then C&W market, in our estimate. Hence, this entry shall have a modest impact on C&W industry volume/margins in the medium term.”
Nuvama also maintained that the foray shall further drive unorganised to organised market share while creating further healthy competition among organised players. With the segment having significant growth opportunities in exports, the brokerage firm maintained, some players may be able to divert capacities, thus further limiting the impact of such new additions.
During FY19-24, per the MOFSL report, the Indian C&W market posted a CAGR of around 6 per cent. However, the revenue CAGR for its coverage companies in C&W stood at approximately 18 per cent, led by market share gains and increasing exposure to international markets. “Given the robust revenue growth and limited new entrants in the industry, leading players (POLYCAB/ KEII) have experienced a strong re-rating, with their market cap posting ~60 per cent CAGR from Jul’19 to Jun’24,” the analysis report by MOFSL stated. The brokerage firm said that in C&W, while obtaining approvals is critical, given its focus/ability to invest in plant & machinery and backward integration, it will not be a daunting task for UltraTech.
While UltraTech has not explicitly mentioned target market share for now, Nuvama said that the entry is unlikely to have any impact on FY25–28 earnings of C&W players.
However, it is worth noting that UltraTech has proposed to leverage its extensive manufacturing expertise coupled with its connection with end-consumers, thereby targeting the highest share of the customer wallet. “The company is likely to capitalise on its strong relationships with real estate players (in the B2B segment), distribution reach through UltraTech Building Solutions outlets (>4,400 outlets as of Dec’24, already selling some non-cement products such as construction chemicals, dry mortars, waterproofing, etc.), and better management of the key raw material (copper) through group company Hindalco,” JM Financial maintained.
Any impact on paints industry?
There are a few fundamental differences between the paints and C&W industry and as listed by Nuvama, they are: i) Distribution channel has to be largely built afresh for wires (versus some overlap in cement-paints case with white cement presence). ii) Cables need approvals from several customers across different user industries (railways, oil & gas, solar)/agencies (that may take six-24 months, depending on SKUs, postcommissioning of the plant). iii) Fragmented nature of C&W industry (versus oligopoly in paints), thus market share gains are hard to come by (each incumbent is strong in select segment/geography). iv) Reasonable margins/RoCE (versus high margins in paints), thus limiting ability to distort price materially by new players.
The paints business is typically considered a high-moat business and Motilal Oswal maintained, making inroads into the distribution channel was considered an uphill task. However, Grasim, within one year of commissioning the Paints business, has built a strong distribution network.
Questions on UltraTech’s focus shift from cement business
UltraTech’s capital allocation may be questioned, however, MOFSL report stated that its focus on the cement business will remain intact. “As such, we do not view this investment as a risk to the company. While the earnings of C&W companies will not be impacted until the plant is commissioned, multiple erosion could occur earlier (unlike Paints companies, where it happened after the commissioning of Grasim’s plant). Additionally, Paints companies have historically traded at higher multiples, unlike C&W companies, which have experienced multiple re-rating in the past few years,” the brokerage firm said.
Though, UltraTech’s net debt increased to Rs 161.6 billion in Jan’25 (after completion of open offer for ICEM acquisition) vs R 27.8 billion in Mar’24 due to acquisition of Kesoram Industries’ cement assets and ICEM, the net debt-to-EBITDA is estimated to remain comfortable at 0.6x in FY27 as FCF generation is expected to remain healthy.
“There does not seem to be much overlap between the distribution networks of C&W and the group’s existing businesses, though UltraTech can initially leverage its UBS outlets (4,432 in Dec’24). Additionally, approvals for supply of C&W into projects can take 6-9 months after the products are ready,” MOFSL concluded.