UltraTech Cement's plan to enter into wires and cables (W&C) segment with a capex plan of Rs 1,800 crore ($210 million) over the two years is being seen as another step by the Aditya Birla Group to offer comprehensive solutions in the construction sector. Grasim Industries, the parent company, earlier entered the paints industry with 'Birla Opus'.
Foreign brokerage CLSA expects this Rs 1,800 crore foray by UltraTech Cement Ltd has potential to drive 4-5 times revenue, with a margin of 11-13 per cent. As per Ultratech Cement, the W&C move would help it expand presence in the construction sector through a high growth and high asset turn sector.
CLSA said given higher dependence on retail (housing) and a lower time to market, UltraTech Cement could focus more on wires than cables. For the cables and wires industry, the segment would require to grow at a 11-13 per cent over the next 4-5 years compounded annually to absorb the announced expansion by incumbents and new players, CLSA said.
Incumbents in the industry are already looking to spend Rs 10,000 crore over the next 2-4 years. A weaker demand could weigh on the profitability of the sector over the medium term, the broking firm warned. For now, CLSA has maintained its 'Hold' rating on UltraTech Cement shares and suggested a target price of Rs 12,100.
"A key discussion point would be why this investment is set under Ultratech and not the parent entity, Grasim, which has the paints business as well. The argument in favour of having the investment under UltraTech is that the influencers, particularly from an urban set up, are similar (real estate developer) and wires are generally used immediately after the construction process," CLSA said.
An argument against could be that given the allied businesses (like paints) are housed under Grasim Industries and, thus, it would have been more relevant to maintain a similar structure.
CLSA said it believes the distribution channel for wires is not entirely similar to cement and building materials. That said, Ultratech has 4,500 UBS stores through which it already sells wires, among others. Against this, Polycab India has 2,200 distributors and 2 lakh retail touch points.
Grasim's entry into the paints segment had earlier led to derating of the sector, CLSA noted.