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UTCEM’s entry into cables and wires: Is it time for valuation multiple de-rating?

* UTCEM’s announcement to enter the Cables and Wires (C&W) space with a capital outlay of INR18b may not initially seem large and disruptive. However, the recent precedence of value erosion in the Paints sector, the capex increase following the initial announcement in Paints, and the Aditya Birla Group’s intention to become a meaningful player (top 2-3) in the segments where they operate into could pose a threat to the valuation multiples of C&W companies, in our view.

* UTCEM’s capital allocation may be questioned, but its focus on the cement business will remain intact. As such, we do not view this investment as a risk to the company. While the earnings of C&W companies will not be impacted until the plant is commissioned, multiple erosion could occur earlier (unlike Paints companies, where it happened after the commissioning of Grasim’s plant). Additionally, Paints companies have historically traded at higher multiples, unlike C&W companies, which have experienced multiple re-rating in the past few years.

* We cut valuation multiples for C&W companies under our coverage (20% for POLYCAB, KEII, and RRKABEL each and 10% for HAVL, given the diversified product portfolio and the highest TAM). We also believe that UTCEM might initially see a mild negative reaction, as the investors have traditionally viewed the company as a pure-play cement firm. We downgrade our rating on KEII and RRKABEL to Neutral from BUY, while maintaining the ratings for POLYCAB (BUY) and HAVL (Neutral).

Brief overview of the domestic C&W industry vs. UTCEM’s approach

? The Indian C&W industry stood at INR800b (FY24), posting a CAGR of ~9% over FY14-24, which was 1.5x of the GDP growth. The industry continues to expand, given the growing demand for electricity and power infrastructure, the rapid growth of renewable energy, the real estate upcycle, the growth of telecom, the rise of data centers, mobility, smart cities, and rapid urbanization. As per estimates; the C&W industry is estimated to grow in the mid-teens over the next five years. The industry remainsrelatively organized, with branded players making up ~74% of the industry (vs. ~61% in FY14), which is expected to further increase to ~80% by FY27.

? Historically, C&W companies have generated lower OPM compared to cement companies. However, they typically achieve higher RoCE due to the higher fixed assets turnover ratio. The average EBITDA margin (over FY20-24) of our coverage companies in C&W stood in the range of ~7-13% (with leading companies like POLYCAB/KEII posting average EBITDA margin of ~13%/10%), compared to ~21% for UTCEM during the same period. However, the average RoCE (over FY20-24) of our coverage companies in C&W was in the range of ~13-19% (with leading companies like POLYCAB/KEII posting an average ROCE of ~19% each) compared to ~11% for UTCEM during the same period.

? During FY19-24, the Indian C&W market posted a CAGR of ~6%. However, the revenue CAGR for our coverage companies in C&W stood at ~18%, led by market share gains and increasing exposure to international markets. Given the robust revenue growth and limited new entrants in the industry, leading players (POLYCAB/KEII) have experienced a strong re-rating, with their market cap posting ~60% CAGR from Jul’19 to Jun’24.

UTCEM’s strong balance sheet could help scale up investments in C&W

* The Aditya Birla Group has recently ventured into new businesses, such as Paints, B2B E-commerce, Renewables, and Jewelry. The management had previously indicated its intention to become a meaningful player (either number one or two) in any business segment it enters.

* UTCEM, through steady expansions (including inorganic growth) and a strategic approach to balance its market presence, is maintaining its leadership position in the Indian cement industry. The company’s domestic grey cement capacity is anticipated to increase to 209.3mtpa by FY27. Further, its capex cost/t (over FY19-24) stood at USD78/t, one of the lowest among its peers.

* Though, UTCEM’s net debt increased to INR161.6b in Jan’25 (after completion of open offer for ICEM acquisition) v/s INR27.8b in Mar’24 due to acquisition of Kesoram Industries’ cement assets and ICEM; we estimate net debt-to-EBITDA to remain comfortable at 0.6x in FY27 as FCF generation is expected to remain healthy (aggregate FCF of INR134b during FY25-27).

* There does not seem to be much overlap between the distribution networks of C&W and the group’s existing businesses, though UTCEM can initially leverage its UBS outlets (4,432 in Dec’24). Additionally, approvals for supply of C&W into projects can take 6-9 months after the products are ready. In contrast, paints were sold in hardware stores where the Group already had a presence through white cement/wall putty and strong connections with influencers-painters.

* UTCEM announced a capex of INR18.0b over the next two years in the C&W sector. We note that UTCEM’s capex guidance is ~25% of the aggregate gross block (FY24) for the top four players (ex-HAVL) in the C&W industry. 60% of UTCEM’s capacity would be towards wires; while 40% will be for cables.

C&W does not seem to have as high a moat as the Paints business

* The Paints business is typically considered a high-moat business and making inroads into the distribution channel was considered an uphill task. However, GRASIM, within one year of commissioning the Paints business, has built a strong distribution network (onboarding new dealers MoM) and is on track to reach a dealer network of 50,000+ by Mar’25. It has expanded its presence in 5,500+ towns and has 131 depots operational across India (2nd biggest depot network in the industry).

* The Group's investments in building plant infrastructure (cement/paints) are significantly higher than those of peers, with their infrastructure among the best in the industry. In C&W, 65% of sales come from cables, where we believe that obtaining approvals, rather than the brand name, is critical. While securing these approvals may be time-consuming, we believe it will not be a daunting task for the company, given its focus/ability to invest in plant & machinery and backward integration.

Does this raise questions about UTECEM’s capital allocation?

* UTCEM has already achieved a domestic grey cement capacity of 175mtpa and plans to increase it to 209mtpa by end-FY27. The C&W industry is not as concentrated as the Paints sector (~55% of decorative paints market dominated by one player). Hence, the investments required would be lower even if the company intends to become a large player.

* Asset turn in the C&W industry is 4-5x, and with an estimated revenue CAGR of ~15% over the next three years, an investment of INR50-60b could enable UTCEM to create a sizeable capacity. While UTCEM investors view the company as a focused firm on the cement business, unlike GRASIM, which is seen as a diversified player, we believe this investment will not be considered a shift from UTCEM’s focus on the cement business. However, further clarity would be required from management regarding future investments in other business segments

Valuation and view: Impact on UTCEM limited; C&W de-rating ahead

* We expect a mild negative reaction for UTCEM; however, C&W players may experience a de-rating in valuation multiples. While there will be no change in earnings estimates for C&W companies over the next two years, there could be a de-rating in their valuation multiples due to the entry of a sizeable player.

* We cut our target valuation multiple for all C&W companies (20% for POLYCAB, KEII, and RRKABEL each and 10% for HAVL, given the diversified product portfolio and highest TAM). C&W business also appears to be highly competitive, with margins lower than UTCEM’s existing business. Additionally, the company’s strategy of entering the distribution channel needs to be observed.

* We now value POLYCAB at 40x FY27E EPS to arrive at our revised TP of INR6,950 (earlier TP of INR8,380 valued at 50x Dec’26E EPS) and reiterate our BUY rating with an upside of +21%. We value KEII at 40x FY27E EPS to arrive at our revised TP of INR4,000 (earlier TP of INR4,780 valued at 50x Dec’26E EPS), while downgrading to Neutral with an upside of +5%. We value RRKABEL at 28x FY27E EPS to arrive at our revised TP of INR1,240 (earlier TP of INR1,600 valued at 35x Dec’26E EPS), downgrading to Neutral with an upside of +12%. We value HAVL at 50x FY27E EPS to arrive at our revised TP of INR1,650 (earlier TP of INR1,740 valued at 55x Dec’26E EPS), maintaining a Neutral rating with an upside of +7%.

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