Cat has landed among the pigeons in India's wires and cables sector as Aditya Birla Group firm UltraTech Cement, India's biggest cement company, has announced its entry into the sector with Rs 1,800 crore investment planned over the next two years which include a plant in Gujarat.
The deep-pockets Birla Group aims to stretch itself further along the construction value chain after it launched Birla Opus last year to sell a range of exterior and interior building products from decorative paints to wood finishes.
Birla's likely price play in the wires and cables sector has delivered a shock to the smaller players. Shares of leading manufacturers Polycab, KEI Industries and Havells fell up to 20% on Thursday as investors fear Birla's huge capex plan can lead to de-rating and margin pressure for existing players, especially when many stocks are trading at high multiples.
Getting a hang of Birla's wires and cables play
Birla's foray into wires and cables business is in accordance with the company's strategy to strengthen its position as a comprehensive building solutions provider. From white cement to wall putty to paints and now to wires and cables, Birla Group is certainly expanding across the construction sector. Birla's copper and aluminium business of Hindalco can provide synergies to its wires and cables play. Volatile prices of copper, a key raw material, have plagued this sector.
While Birla Group can pose a big challenge to incumbents with its sharp price plays, brokerage firm Jefferies says that UltraTech’s entry should not be seen as a major disruptor in the short term. The firm notes that while UltraTech shares a similar customer base with cement, its sales channel is not identical. However, UltraTech has thousands of UltraTech Building Solutions (UBS) stores where it sells a wide range of home building products including electrical components such as switchboards. Probably, that's why Birla is launching the wires and cables business under UltraTech instead of Grasim Industries which houses the paint business Birla Opus. “Distribution synergies will be a key factor. UltraTech is a giant in the construction materials space, and its ability to cross-sell through UBS stores could accelerate adoption,” CLSA observed.
There could be some concerns over Rs 1,800 crore capital expenditure for the new foray. Even though UltraTech has already charted out its capex plans for the cement business, many think the capex for the new foray could dilute focus on UltraTech's main cement business where it's an industry leader by far but faces aggressive moves by the Adani Group which is exploiting its group adjacencies to expand in cement sector while also making bold inorganic moves. UltraTech shares fell by 4.8% on the BSE in early trade after the firm announced its entry into the wires and cables segment. “UltraTech’s net debt stood at Rs 16,200 crore post the India Cements acquisition. With Rs 1,800 crore earmarked for W&C, this will account for 13% of cumulative free cash flows over the next two years,” Citi pointed out. “While the business could generate over Rs 1,200 crore in revenue (14% of estimated FY27 topline), the strategic fit remains debatable.”
CLSA estimates that this venture could generate 4x-5x revenue growth with margins in the range of 11%-13%. The expansion aligns with UltraTech’s broader construction ecosystem strategy, leveraging its existing network and distribution might. To begin with, UltraTech might focus on wires instead of cables given less time to market the retail nature of the business as against the cables business which requires several approvals and tender wins.
Crossed wires in the sector?
India's energy and construction boom means huge potential for the wires and cables sector. Given high growth (13% CAGR over FY19-2024) and the migration towards organised players, Ultratech believes the segment provides an attractive entry opportunity for a new player.
High fragmentation with a large number of small players in the unorganised sector make it attractive for a deep-pockets player such as Birla, even more than the paints sector, where Birla entered last year, which has players with deep moats such as Asian Paints. Polycab (20%), KEI (12%), Havells (8%), and KEC (6%) are the major players in the cables segment while Finolex (15%), RR Kabel (12%), Polycab (10%), V-Guard (8%), Anchor (7%), and Havells (6%) are the leaders in wires. “This is an where no single player commands more than 15% share in wires and 20% in cables. The industry comprises nearly 400 players, ranging from SMEs to large enterprises, with revenue between INR 500mn and INR 4bn. The industry is, therefore, ideal for a new entrant with deep pockets,” JM Financial’s Gaurav Jogani said.
An already high planned capacity in the sector could be a challenge if demand slackens and supply remains steady thus putting pressure on margins. If demand doesn’t keep up with the rising supply, profitability could take a hit. A potential de-rating of the sector cannot be ruled out, especially if UltraTech adopts aggressive pricing strategies, similar to Grasim’s approach in paints, Motilal Oswal cautioned.
India's cable and wire industry has significant growth potential in exports, amid a balanced demand-supply scenario in the domestic market. Some companies may choose to allocate their additional capacities to meet export demand, according to a report by Nuvama Research.
The report also noted that one of the key trends observed in the industry is the shift from unorganised to organised market players. The organised segment's market share has likely increased from 68 per cent in FY19 to around 73 per cent in FY24. This shift is expected to continue, driven by the competitive environment among major players. "We estimate C&W [cables & wires] industry is heading for a balanced demand-supply scenario over next three-four years based on publicly announced capex by leading players and 13 per cent CAGR in industry revenue (similar to FY19-24)," Nuvama said.
A key factor in this transition is the expected capacity utilization (CU) in the third year, which is estimated to be around 60-70 per cent, Nuvama highlighted. This will be driven by companies expanding their distribution networks for wires and obtaining necessary approvals for various cable stock-keeping units. Despite this growth, the estimated capacity additions will account for less than 5 per cent of the total C&W market by that time. As a result, the impact on the industry's overall volume and profit margins in the medium term is expected to be modest. Overall, the C&W industry is poised for steady growth with increasing competition among organised players, rising export opportunities, and a transition towards a more structured market environment.
