On the back of rapid infrastructure growth and growing real estate as well as power demand, one sector that has done well is cables and wires. However, now the entry of the country's largest cement company UltraTech is giving investors in companies in the sector the chills.
On Thursday, shares of cables and wires companies declined sharply, with KEI Industries tumbling over 18 per cent, Polycab India slumping nearly 15 per cent, and RR Kabel falling over 12 per cent. Other companies like Havells India and Finolex Cables were also down 5-6 per cent.
UltraTech is the country's largest cement maker. The Aditya Birla Group company has a capacity of 175 million tonnes per annum in India. Why is it now entering the cables and wires sector?
"We intend to expand our presence in the construction value chain through our foray in the cables and wires segment, which aligns with our vision of providing comprehensive solutions to our end customers in the construction sector," said Kumar Mangalam Birla, the chairman of Aditya Birla Group.
He says the company will continue to focus and grow its core cement business. Ultratech remains committed to delivering superior quality building materials and solutions, he added.
UltraTech proposes to leverage its extensive manufacturing expertise along with its connect with the end-customers to deliver high-quality wires and cables and thereby target a higher share of the customers' wallets.
UltraTech has earmarked a capital expenditure of Rs 1,800 crore over the next two years towards this expansion into wires and cables. It will set up a plant near Bharuch, Gujarat and that is expected to be commissioned by December 2026.
The wires and cables industry has witnessed a compounded annual revenue growth of around 13 per cent between the financial years 2019 and 2024. With the migration from the unorganised to the organised market, the outlook continues to remain robust, providing an attractive opportunity for a new player in the sector, UltraTech feels.
Certainly, there are some synergies that UltraTech will be able to take advantage of in expanding and growing in cables and wires. Given that it is the largest player in the cement industry, it already has strong relations with companies in construction and real estate. Copper is a key input in wires. Aditya Birla Group company Hindalco is a major player in copper, which could ensure steady supplies as well as sourcing advantages for UltraTech.
However, despite UltraTech's bullishness on the sector, the company's shares were down 5.2 per cent at around Rs 10,395 on Thursday afternoon. What do analysts think of UltraTech's plans?
"The company is likely to capitalise on its strong relationships with real estate players, distribution reach through UltraTech Building Solutions outlets, and better management of the key raw material copper through group company Hindalco," said Dharmesh Shah of JM Financial Institutional Securities.
He noted that there were more than 4,400 outlets of UltraTech Building Solutions as of December 2024, already selling some non-cement products such as construction chemicals, dry mortars and waterproofing.
UltraTech's foray into cables and wires, follows Aditya Birla Group company Grasim entering the paints business in 2024 and clearly signals its intent to strengthen its position as a wide-ranging building solutions provider.
The wires and cables industry has an EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 10-12 per cent, according to Shah, who feels that, on full ramp-up, it would imply 4-5 per cent of potential EBITDA accretion on the financial year 2027's EBITDA base.
Will UltraTech's foray into the cables and wires business impact incumbents?
The cables and wires market was estimated to be around Rs 82,000 crore in 2023-24. Close to 70 per cent of this market is organised and wires account for around 35 per cent of the overall market, point ICICI Securities analysts Aniruddha Joshi and Manoj Menon. UltraTech could gain share from smaller and unorganised players as well as from B2B markets, analysts feel.
"After analysing Birla Group’s entry in paints, we note Birla Opus has offered 17 per cent lower pricing than peers and an additional credit period to trade. If UltraTech also offers lower pricing than incumbents in cables and wires, it can potentially gain market shares at least in business-to-business (B2B) segments," said Joshi and Menon.
Cable and wire companies have also expanded their EBIT margins by 400 basis points over the financial years 2014 to 2024. Aggressive pricing by UltraTech may cap the margins. There is also risk of decline in the industry EBITDA pool, added the analysts.
"If it gains market share of 5 per cent by FY2030, growth rates (CAGR) for incumbents may decline by 100–150 bps over F20Y24–2030," they further said.
