UltraTech Cement’s recent announcement of a ₹1,800 crore investment in a cables and wires (C&W) business has certainly stirred up the markets. It seemed just yesterday that the cement behemoth was locked in a battle with rivals to solidify its cement empire. This move, therefore, appears to be quite a curveball.

Wiring Up The Construction Chain

Why this sudden diversification? A closer look reveals that cables and wires are not as far removed from UltraTech’s core business as one might think. It’s arguably an extension of the construction value chain. UltraTech had already dipped its toes in this area in 2007 with UltraTech Building Solutions, offering a one-stop-shop for construction needs. This network of 4,400 outlets already deals in steel, concrete, cement, electrical, waterproofing, and even tiles.

While distributing goods is one thing, manufacturing them is a different ball game altogether. UltraTech, known for its cement business with industry-leading financials, is venturing into a competitive sector. Cement, despite brand equity, remains largely a commodity, especially during cyclical downturns when discounts erode brand loyalty. The move into C&W could be a strategic attempt to ramp up value-added businesses and reduce reliance on the commoditised cement segment. Read more on this expansion.

Competitive Wires Domain

But isn’t the C&W sector fiercely competitive? A report from CLSA highlights a ₹10,000 crore expansion already underway by existing players. UltraTech’s ₹1,800 crore investment adds to this capacity. The report suggests that the industry needs to grow at 11-13 percent to absorb this influx. Established giants like Polycab, Havells India, and KEI Industries already dominate the domestic market.

Can UltraTech, aiming for under 10 percent market share in four years, truly make a mark? With infrastructure slowdowns and residential project delays looming, a market dip could strain UltraTech’s strong cash flows. However, UltraTech’s history of successfully integrating acquisitions and expansions offers a glimmer of hope. Critics might question why this investment wasn’t housed under Grasim, the Aditya Birla group’s flagship, but CLSA argues C&W’s proximity to cement in the construction product spectrum justifies its placement within UltraTech. The Adani group’s foray into C&W and copper smelting could also be a motivating factor for UltraTech.

RBI’s Regulatory Easing

Interestingly, around the same time as UltraTech’s announcement, the Reserve Bank of India (RBI) rolled back the increased risk weights for bank loans to NBFCs and microfinance institutions (MFIs) imposed in 2023. This move is seen as positive for the financial sector, freeing up capital for banks and potentially boosting credit growth. While this easing might seem counterintuitive given concerns about asset quality, it signals the RBI’s intent to support loan growth as the economy faces a cyclical downturn. The sectors that will benefit most from this are MFIs and NBFCs and banks having significant exposure to these sectors. Banks like Bandhan, RBL Bank and IDFC First Bank stand to gain from this move.

Incumbents in the C&W business are facing a period of uncertainty, reflected in the sharp drop in their stock prices following UltraTech’s announcement. Investors are clearly signalling that UltraTech’s entry could trigger intense competition and reshape the construction materials landscape. While this might create short-term headwinds for UltraTech and existing C&W players, a larger, more organised market could emerge, potentially softening the blow of market share losses.

Will UltraTech’s gamble pay off and reshape the construction industry? The coming quarters will reveal if the cement giant can successfully wire up a new growth engine while incumbents brace for disruption.