UltraTech’s entry into cables & wires shocks KEI, Polycab and Havells stocks

A primary concern is that the C&W sector could have a similar fate to that of the paints industry, which has seen new companies enter in recent years, weighing on valuation multiples of incumbents. UltraTech’s capex for the C&W endeavour is ₹1,800 crore over the next two years. It will set up a plant near Bharuch in Gujarat, which is expected to be commissioned by December 2026.

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As such, the impact on the profitability of C&W companies is expected to be nil in the near-to-medium term. “While the earnings of C&W companies will not be impacted until the plant is commissioned, multiple erosion could occur earlier (unlike with paints companies, where this happened after the commissioning of Grasim’s plant),” said a Motilal Oswal Financial Services report dated 27 February. “Additionally, paints companies have historically traded at higher multiples than C&W companies, which have experienced multiple re-rating in the past few years,” it added.

Grasim launched its paints brand in the March 2024 quarter, more than two years after it entered the paints business in January 2021 with an initial investment of ₹5,000 crore, which was later doubled.

Sure, the C&W industry is fragmented (unlike paints, which is an oligopoly), which could make market-share gains difficult. Plus, “Distribution channel has to be largely built afresh for wires (versus some overlap in cement-paints case with white cement presence),” said Nuvama Research.

Overcapacity risk

Still, UltraTech’s entry into C&W will increase competition, especially at a time when companies are adding capacity, leaving them open to the risk of overcapacity. Moreover, even if demand remains sturdy, the impact on profit margins remains to be seen, especially if UltraTech adopts aggressive pricing.

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The scaling up of revenues for UltraTech will hinge on the pace at which it ramps up manufacturing and distribution. There is scope for the company to gain share from unorganised firms. “Assuming 4-5x asset turnover, Ultratech’s revenue potential can be estimated at 5-7% of the C&W industry in FY29 (estimated),” said Jefferies India analysts in a report on 26 February. The broking firm estimates the overall C&W industry will be worth about ₹1.3 trillion by FY29. On an industry basis, segments such as power transmission and industrial cables are likely to require two to four years for prequalification, Jefferies said.

On the other hand, sales in the residential segment could potentially commence immediately. Thus, Jefferies forecasts that the competitive impact on Polycab could be lower, as 65-70% of its sales mix is cables (business-to-business). On the other hand, the impact on housing wires/business-to-consumer players such as Finolex or Havells could be higher.

UltraTech stock slumps

To be sure, UltraTech’s investors don’t seem thrilled – the stock fell by about 5% on Thursday. Notwithstanding the appeal of the strong growth and return profile of India’s C&W sector, the development also draws attention to UltraTech’s capital allocation. 

No doubt the proposed capex is relatively small for the company—about 10% of its annual capex guidance. But this could create uncertainty on whether incremental capital allocation will be in cement or the construction value chain. This uncertainty may dissuade investors who only want exposure to the cement sector.

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