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Cables & Wires Foray: A small sigh of relief; much more needed!

Executive summary

C&W foray is a welcome move, could have been a bigger bet

Ultratech Cement (UTCEM) announced its foray into the cables & wires (C&W) industry with an investment of INR 18bn. C&W industry is an attractive space to enter into in our view given early teen growth rates and higher than cement sector RoCE of the incumbents. UTCEM and the larger Birla parentage have all the necessary ingredients to make this foray a success and outperform the incumbents in potential RoCE, in our view. The C&W foray is a welcome move but insignificant in the overall scheme of things for UTCEM (it is indeed a significant development from the incumbent C&W players’ point of view though). UTCEM should/could have made a bigger foray into the space given its solid balance sheet, strong and pan India BPD footprint, execution capabilities, unparalleled experience in selling to B2C home building space and institutional/government projects in the infra B2B space.

UTCEM’s capital allocation strategy needs to be less conservative

We have always been concerned about Ultratech’s capital allocation challenges given it has limited growth options in the Cement industry, and overgrowth is detrimental to the sector and itself. Due to lack of attractive investment opportunities, UTCEM has deleveraged its balance sheet over the years, although it is not optimal from a return profile point of view. The concern we have is UTCEM’s suboptimal capital structure from an RoE point of view – its balance sheet strength is underutilised, diluting higher RoE potential. We strongly believe the paints business foray was an opportunity missed to its group company some time back, given the paints sector’s adjacency to cement business.

Negative stock price reaction initially was a knee jerk one

Although the initial stock price reaction to this C&W foray announcement was negative (overall market sentiment was weak too), we believe it is a knee-jerk reaction only, and this foray is going to be value accretive to shareholders in the long run.

Core cement business is solid as always

UTCEM is well positioned to deliver in its core area, i.e., the cement sector. We forecast FY25/26/27E volume of 131.0/142.7/154.2 Mnt, EBITDA/t of 972/1,095/1,208 and EBITDA of INR 127.3/156.3/186.2 Bn.

Valuation:

We have valued UTCEM using EV/EBITDA methodology. Based on our EV/EBITDA approach on the cement business, applying a multiple of 20x (FY27E), we arrive at a valuation of INR12,160 per share, implying a 17.6% upside from the current levels. Given UTCEM’s focus on robust expansion plans, cost saving projects, entering into new lucrative ventures, we are constructive on the company

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