UltraTech Cement announced plans to foray into the cable & wire industry. Following this, UltraTech Cement’s share price declined 5.3% to an intra-day low of Rs 10,381. The brokerage houses have been majorly on a neutral side, but Citi and Motilal Oswal took a different approach. The international brokerage house CLSA thinks that the company could generate 4 to 5 times revenue growth with an 11-13% margin.
A few other brokerages also see this as a positive development for the stock.
Jefferies on UltraTech Cement: Buy on correction
Jefferies said that any knee-jerk negative reaction in the share price of UltraTech Cement should be used as a buying opportunity. According to them, capex is relatively small and appears more like deployment of burgeoning EBITDA/CF profile of the company. They have a Buy with a target price of RS 13,265, implying 21% upside. According to them, ” While no specific inputs are available on product profile/target segments, Co expects to leverage its manufacturing expertise and end-customers’ connects to scale up the new segment.” They pointed out that, “while the customer base for wires/cables is similar to that for Cement, the channel of sales is different (barring few overlaps), catering to electrical/hardware needs for one vs focus on construction/building materials for the other.”
Motilal Oswal on UltraTech Cement
Motilal Oswal sees the entry of UltraTech Cement as a big blow to C&W companies. It sees it as a threat to the valuation multiples of C&W companies. “However, the recent precedence of value erosion in the Paints sector, the capex increase following the initial announcement in Paints, and the Aditya Birla Group’s intention to become a meaningful player (top 2-3) in the segments where they operate into could pose a threat to the valuation multiples of C&W companies, in our view,” said Motilal Oswal in a research note. However, there is no risk to UltraTech Cement as it is focused on the cement business. “As such, we do not view this investment as a risk to the company.” They believe UltraTech’s strong balance sheet could help scale up investments in cables and wires.
The report added that historically, C&W companies have generated lower OPM compared to cement companies. “However, they typically achieve higher RoCE due to the higher fixed assets turnover ratio. The average EBITDA margin (over FY20-24) of our coverage companies in C&W stood in the range of 7-13% compared to 21% for UltraTech Cement during the same period.” The average return on capital for the cable and wires stocks is also lower than Ultratech Cement’s return on capital in the same period.
JMFinancial recommends Buy on UltraTech Cement
JMFinancial also recommended a Buy on UltraTech Cement with a price target of Rs 13,000, implying upside of 24% from current levels. After the plant comes up in December 2026, they estimate potential EBITDA accretion of 4-5% 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. Though 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.” They added that, “UltraTech’s 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.”
Nuvama Institutional Equities on UltraTech Cement
The brokerage firm Nuvama Institutional Equities said that the cable & wires industry will not see a major impact and if they see so then also that’ll be in FY28, “at best.” The industry is likely to see less than 5% of the total industry. It expects the industry to grow by an annual compounded rate of 13% due to which impact will be modest. Also, the C&W industry is very fragmented in nature. For example, the largest player has less than 18% of market share. Secondly, the companies in the sector face distribution nuances and approvals for cables. However, it pointed out that enhancement of the capex plan by UltraTech Cement is a key monitorable risk.
Citi has a different stand. It sees the entry as small in C&W, which could hurt positioning as a cement pure play.