UltraTech’s entry into cables & wire: This smallcap proxy stock is insulated

By the end of FY25, it is targeting a high single-digit market share. It is expected to be the second largest player in terms of installed capacity and brand visibility in decorative paints, an industry estimated at ₹76,000 crore.

Behemoths like Asian Paints are still dealing with this shock.

A similar trajectory could unfold in the cable and wire industry as another Birla group company – UltraTech Cement, eyes this segment.

The Indian market for wires and cables is estimated at ₹84500 crore (FY24, source: RR Kabel), expected to grow at 12% CAGR (FY23-FY27), with branded players commanding 74% market share in FY24, and expected to corner 80% by FY27.

The industry is well set to grow. Rise in infrastructure investments, power transmission, real estate and construction boom, smart cities, urbanization, electrification and renewable energy, are some of the tailwinds.

Over the next two years, UltraTech Cement has approved a capex of ₹1800 crore for wire and cables to further extend its footprint in the construction value chain. The target areas include residential, commercial, infrastructure, and industrial applications.

With other group companies like Hindalco to support raw material needs (copper and aluminium are key raw materials) and potential distribution synergies through existing business of UltraTech Building Solutions, this could be a potential disruptor to watch out for.

No wonder the stocks of leaders in this space fell in response.

Polycab, RR Kabel, and KEI Industries slipped up to 20% on the news. Havells and Finolex have felt the shock as well.

With the rise in infra and capex, wire and cable stocks have seen sharp valuation rerating in the last few years. Even known risks like dependence on raw material and the commoditised element in the business (input cost comprise 70-80%) have been ignored at these valuations.

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Of course, this unforeseen risk was not priced in.

The existing players in the cables and wires industry may witness adverse impacts on growth and potential margins.

But looking beyond the negatives…

Today we’re going to focus on a lesser-known proxy play in the cables and wire industry that is relatively ‘insulated’ from this development.

Ddev Plastiks Industries is one of the leading domestic players in the polymer compounding industry (a proxy play on cable and wire industry).

It makes products for cable/wire and other industries that offer properties like insulation, corrosion and heat resistance, low density and high durability and tensile strength.

Ddev has 50% market share in Sioplas and 33% market share in XLPE (cross linked polyethylene) compounds that are used in cable insulation in the power cable industry.

About 79% of its revenue comes from cable and wire companies. Leading branded players in the industry are its regular clients.

In FY24, 22% of Ddev’s revenue came from Apar Industries, Havells, KEC, Paramount, and Polycab.

It’s possible that UltraTech could be a future client, too.

The company has been optimizing capacities to produce higher margin products. This has led to margin expansion from 6.7% in FY23 to 10.6% in FY24. Going forward, it has plans to produce products that cater to insulation needs for higher voltage cables.

The return ratios for the company are over 30%. The debt-to-equity ratio is almost negligible. The management is targeting a volume growth of 15% CAGR. The stock is trading at a PE of 12 times.

In the past one month, the stock has fallen 15%. From its peak price of ₹458 touched last year in July, the stock has fallen 49%.

After all, the business is not without its risks. Some of these risks include potential backward integration by cable and wire industry, export slowdown, and competition from both domestic players like Shakun Polymers, and global players such as Dow, LG, Hanwha, and Borealis.

That said, amid disruptive developments in the wire and cable industry, we believe this ‘insulated’ smallcap proxy play deserves to be on your watchlist.

Do note that this article is for information purpose only and does not imply any view.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com