UltraTech Cement, India’s leading cement manufacturer, on Tuesday announced that it proposes to establish a wires and cables segment by investing ₹1,800 crore in the next two years. The company intends to capture a larger wallet share of the construction industry by leveraging its end-customer relationship. The cables and wires industry grew at 13 per cent CAGR in FY19-24 as per the press release and the company intends to partake in the unorganised to organised shift in the cables industry. The plant, proposed in Bharuch, Gujarat, is expected to be commissioned by December 2026.

The impact of the announcement was felt in the listed cables and wires space as shown in the table. In the two trading sessions that followed, the stocks declined 8-20 per cent including UltraTech Cement. In simple terms, an announcement of the ₹1,800-crore capex plan wiped out close to ₹31,000 crore from the combined market value of the cables companies.

The sharp reaction can be attributed to three factors — the overall weakness in markets, the high valuations of the sector and investors taking lessons from the paints experience. In the current market environment, the high PE sectors are expected to face a faster decline, and the negative news exacerbated the impact. The wire stocks are trading at an average of 30 times one-year forward earnings despite an average correction of 21 per cent in the last one year.

Paints experience

Also, investors have the paints experience to read from. JSW group announced a paint foray in 2019 itself, Grasim Industries, another Aditya Birla Group company, announced a fresh round last year and Pidilite’s in 2023. This has had a telling impact on the paint stock returns. The last five-year returns of Asian Paints (21 per cent) or Berger Paints (3 per cent) have underperformed Nifty-50’s 98 per cent returns. The high valuations of the paints industry could have been a reason but the incremental competition, which was initially ignored, was certainly one of the reasons for the underperformance. This, too, coming at a time when government capex and residential housing demand are at their highest and is positive for the paints business. The parallels to the current situation were overwhelming, leading to the sharp correction in cable stocks. The high valuations of the segments, booming end-user industry of real estate and infrastructure building, the foray by a large conglomerate — Aditya Birla in both cases — weighed in on the stocks.

A simple analysis of the cables industry metrics reinforces the threat posed by the new entrant. The average asset turnover of the five cable companies is at a staggering nine times. That implies that with a relatively-small asset base, high sales traction can be generated. The proposed ₹1,800-crore capex should catapult the new venture to the second-ranked player in the sector. The sales are quite valuable too, with an average price to sales ratio of three times. The potential value proposed by UltraTech is evident with such metrics.

Among the companies impacted, Havells India with its diversified portfolio, including high growth segments of air conditioners and kitchen appliances can absorb the competition in cable and wires segment.