Cables and wires — an overview
Industry overview
Cables and wires industry find its major use cases in infra, real estate sectors. The industry is poised to grow by 10% over the next few years aided by government spending/infra building across the world. US has announced a major infa revamp after 40 years.(The Bipartisan Infrastructure Deal). In the United States, 1 in 5 miles of highways and major roads, and 45,000 bridges, are in poor condition. You can read more about this bill here.
“70%+ of the industry is organized and the profit pool lies with 5–6 big players”
Use cases of wires and cables
Power Cables are used for bulk transfer of electrical energy from generating power plants to sub-station and thereon for distribution to end consumers.
Extra High Voltage/High Voltage Cables are used mainly in power stations, sub-transmission, large switch yards and major industrial, commercial and residential complexes.
Medium Voltage Cables are used for power distribution.
Low Voltage Cables have a variety of end-user applications in addition to being used in power distribution. The LV power cables has the widest application and therefore, constitutes the major quantum in the power cable segment.
Wires and cables raw material:
Copper, Aluminium, PVC, steel are the major raw materials. Copper is the dominant material used in wires and cables and is very volatile as seen below. PVC compound like cross-linked polyethylene (XLPE) compound, primary polyethylene and a host of polymeric compounds, are by-products of crude oil
However, the companies have managed to pass on this volatility to consumers, managing to keep EBITDA margins rangebound. For ex: Look at KEI’s margins over last 10 years. They have managed to keep the EBITDA margins in a narrow tight band from 9 to 11%.
Another example is Polycab margins as shown in the image below:
Different types of cables and wires:
The core of the wires contains of a copper rod, PVC insulation and copper mesh. For cables, instead of a single copper wire, there are multiple strands of copper.
Wires and cables competitive benchmarking:
“Except Universal, house wires which is a proxy to real estate is manufactured by everyone, with Finolex and Polycab having the highest mind”
Market share of organized players:
*Finolex doesn’t have a big presence in cables, its market share in wires is much higher at 21%.
The big 4 have been chipping away the market share from the smaller franchisees and other unorganized players. Organized players have roughly gained over 10% market share from unorganized players in the past 8 years
Financials:
Sales growth YoY:
All the cos have shown a decent growth taking market share from the unlisted players.
Operating margins:
From the above graph it is evident that margins eventually revert to a band of 11–13% as also expressed by commentary of all the players
Sales and Profit CAGR:
Polycab and KEI have been the most consistent, Apar numbers are skewed due to its outperformance in the last year. Finolex on the other hand due to management feud and a less aggressive management was in a period of no growth. However, this will change very quickly as there of talks of feud being settled and the management shifting focus back to growth.
Q3'23(Rs.Mn) performance:
ROE analysis:
As we see the industry mainly operates in a high asset low financial leverage scenario. The average D/E ratio is negligible and the companies are cash rich.
*Finolex has a little higher number mainly due to the other income received from its parent and also mainly a wire centric portfolio as compared to others. Finoles also has a depressed asset turnover mainly due to its holdings of finolex industries and a large cash on the books to the tune of 4000 cr.
Case study — Apar Ind
Apar was mainly valued as a commodity company converting aluminium, copper into conductors and making transformer oil, and lubricants.
Apar is the Largest aluminum and alloy conductor manufacturer globally. 3 rd largest global manufacturer of transformer oils,Largest cable manufacturer for Renewables in India,1st Indian player to create guidance OFC for torpedoes & tether cables for surveillance systems,1st in India to have T-oils approved for ultra-high voltage transformers,1st Indian company to get an AdBlue certification by VDAGermany.
If apar was a pure cables/wires company like KEI, assuming an EVEBITDA multiple of 20, Apar is likely to do an EBITDA of 300crs+ only in cables wires segment, leading to an EV of 6000 cr( Current market cap is ~8700 crs).
Extremely bullish Q3’23 management commentary:
Key triggers are cables going into generation(nuclear, wind, solar) and Public transportation(metros,railways). Supplied 50% cables in Sydney metro
Power beam wires(50% more current, more life short circuit proof). This will find a higher use case for export markets. Power beam wires cost 1 rs/foot extra
Beneficiary of Revamped distribution sector scheme(RDSS)
Export market is 1500 cr , was ~200 cr 2 years ago
Margin guidance for cable 10–12% EBITDA, conductor 22000–25000/ton, oil 5000–5500/MT
No competition in elastomeric other than universal
Planning a Capex of 350 cr in cable with asset turns of 10x
B2C buss will do 200 cr and 350 cr next year
Future growth estimates:
Management expects to grow 20–25% YoY. It wont be a surprise if Apar ends up doing an EBITDA of 1500 cr by FY 25.