The cable and wire stocks are in focus this morning. Stocks like Havells, KEI, Polycab and RR Kabel plunged as much as 13 percent intra-day on the news of entry of Ultratech in this segment. Motilal Oswal sees this foray as the cause for value erosion in the cable and wires sector and downgraded the rating on KEI and RR Kabel to Neutral from Buy while maintaining the ratings for Polycab (Buy) and Havells (Neutral).
Motilal Oswal cut valuation multiples for cable & wire companies under their coverage. They reduced it by “20% for Polycab, KEI and RR Kabel each and 10% for Havells given the diversified product portfolio and the highest TAM.” They also expect UltraTech Cement to see a mild negative reaction, as the investors have traditionally viewed the company as a pure-play cement firm.
According to Motilal Oswal, UltraTech Cement’s foray into Cables and Wires (C&W) space with a capital outlay of Rs 1800 crore may not initially seem large and disruptive. However, if one saw the precedent in the paint sector, “it could pose a threat to the valuation multiples of C&W companies.”
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They used the example of Aditya Birla Group’s intention to become a meaningful player (top 2-3) in the paints sector and the capex announcement there. “While the earnings of cable & wire companies may 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).”
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