UltraTech Cement announced plans to foray into the cable & wire industry. Following this, UltraTech Cement’s share price declined 5.3% to an intra-day low of Rs 10,381. The brokerage houses have been majorly on a neutral side, but Citi and Motilal Oswal took a different approach. The international brokerage house CLSA thinks that the company could generate 4 to 5 times revenue growth with an 11-13% margin.
A few other brokerages also see this as a positive development for the stock.
Jefferies on UltraTech Cement: Buy on correction
Jefferies said that any knee-jerk negative reaction in the share price of UltraTech Cement should be used as a buying opportunity. According to them, capex is relatively small and appears more like deployment of burgeoning EBITDA/CF profile of the company. They have a Buy with a target price of RS 13,265, implying 21% upside. According to them, ” While no specific inputs are available on product profile/target segments, Co expects to leverage its manufacturing expertise and end-customers’ connects to scale up the new segment.” They pointed out that, “while the customer base for wires/cables is similar to that for Cement, the channel of sales is different (barring few overlaps), catering to electrical/hardware needs for one vs focus on construction/building materials for the other.”
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Motilal Oswal on UltraTech Cement
Motilal Oswal sees the entry of UltraTech Cement as a big blow to C&W companies. It sees it as a threat to the valuation multiples of C&W companies. “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,” said Motilal Oswal in a research note. However, there is no risk to UltraTech Cement as it is focused on the cement business. “As such, we do not view this investment as a risk to the company.” They believe UltraTech’s strong balance sheet could help scale up investments in cables and wires.
The report added that historically, C&W companies have generated lower OPM compared to cement companies.
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