Large cable manufacturers gain as consolidation gathers momentum

Healthy demand uptick and pricing power also improve growth prospects, say analysts

For larger manufacturers in the highly fragmented cable industry, the gathering pace of consolidation is a key positive. This adds to their improving growth prospects and profitability.

Channel checks by analysts show that the pandemic has left smaller and regional companies starving for cash. Their stretched working capital needs amid recovering demand have resulted in market share gains for peers with larger capacities, stronger balance sheets, and diverse portfolios. Analysts estimate the share of unorganised players in this sector to decline to 26 per cent by 2024, from around 35 per cent as of 2018.

Even as the cables and wires segment witnessed muted growth in the first half of the ongoing financial year, Edelweiss Securities says its conversation with dealers, etc, show demand growth is better for larger players in this space, pointing at a possible shift in market share. “Volumes have gradually picked up with a few segments (retail wires) growing year-on-year during Q2/Q3 for larger players,” says Amit Mahawar, research analyst, Edelweiss Securities. “Dealers are hopeful of breaching their FY21 targets, led by both pricing and better volume growth. Government demand, too, has recovered well in recent months,” he adds.

Naveen Trivedi, institutional research analyst, HDFC Securities, echoes Mahawar's view. "Volumes have seen a gradual pick-up over the recent months, with large organised players doing better and gaining market share from the unorganised sector. Organised players are better placed owing to their large capacities and strong balance sheet as the unorganised sector struggled to overcome issues of supply chain disruptions, etc."

Prices of key raw materials like copper, aluminium, and polyvinyl chloride (PVC) have rebounded sharply on the back of improved demand outlook after the easing of lockdown curbs. But, there isn't a situation to worry yet. Typically, companies pass on the higher input cost to customers with a lag. Notably, companies have been swift in taking price hikes with the bulk of costs passed on in recent months. Subsequently, Edelweiss estimates revenues for these companies to grow between 1 per cent and 5 per cent, largely led by price, in the ongoing financial year, as compared to an earlier expectation of a flat to 9 per cent contraction. Margins, too, are seen expanding in the range of 60 basis points and 130 basis points during the same period.

Not surprisingly then, stocks like Polycab India, KEI Industries and Havells have surged in the range of 21 to 35 per cent over the past three months.

Yet, the biggest concern for the Street remains the sustenance of demand. Demand for wires and cables is largely dependent on government and private capex, such as infrastructure, increase in residential/commercial complex, defence, and expansion in manufacturing activities. Any slowdown in the spending by the government and private enterprises can adversely impact the sector’s outlook.