FMEG Industry: Wire and cable stocks offer a huge opportunity; should you invest?

Cable and wire stocks have been on a tear since the pandemic, with many companies delivering multi-bagger returns. The consumer electricals industry, which also includes fast moving electrical goods (FMEG), is estimated to post 10% CAGR in FY23-27E on the back of rural electrification, growth in real estate, transition towards clean and green energy, disposable income growth, shift towards branded players and investments in infrastructure projects. Many wire and cable manufacturers have increased their focus on the high-margin FMEG segment (fans, lights, etc.), which has grown at 10% annually, for the last five years.

Cables and wires players have the potential to grow up to 2x GDP. Incremental growth is likely to stem up from sunrise industries such as electric vehicles. Domestic upcycle & exports share gain is also expected to sustain premium valuation. Emerging industries such as fibre optics for 5G, electric vehicles and renewable energy promise additional avenues for growth. The launch of the ‘Pradhan Mantri Suryodaya Yojana’ in January 2024 for the installation of rooftop solar for 1 crore (10 million) homes should provide an incremental boost to wire makers.

Opportunity is huge ahead

Energised by India’s robust economic growth, the wires and cable industry (40-45% of the electrical sector market) has witnessed a massive surge over the last few years. Major players have experienced significant topline and profitability gains. The Indian government’s ongoing focus on housing and infrastructure development should continue to drive structural demand for the wires and cables industry. In fact, continuation of these policies post the general elections in 2024 will only reinforce the sector’s strength.

The government aims to have large-scale electronics manufacturing in India with Rs.1.97 lakh crore allocated under the PLI scheme. Various initiatives have been launched by the government to boost digital infrastructure such as Digital India and Bharatnet, leading to higher demand for internet connectivity that bodes well for the industry.

The industry is on a capacity expansion spree. KEI plans to spend around Rs.1,000 crore in the next three years. Finolex Cables has guided capex to be around Rs. 300 crore for the next 18-20 months. Havells has planned an investment of about Rs. 600 crore for the development of a cable manufacturing unit.Also Read: DCG Cables & Wires Ltd IPO: Issue booked over 5x so far on Day 3 led by retail investors, NIIs ; check GMP

China+1 policy

The Indian wire and cable industry majorly exports to the USA constituting approximately 18% of exports, followed by UAE (9%) and UK (9%). The Indian W&C market became net export positive for the first time in CY 2019 and has been export positive since then. W&C exports have grown by 23% CAGR in the past 4 years and could rise significantly due to the strong demand in developed markets and the ‘China+1’ policy, export incentives, transition towards clean and green energy.

New initiatives bodes well

With the ongoing transition towards EVs, the increased demand for supply of charging stations should drive the supply of more electrical products as well. Moreover, the communication cables industry has also started witnessing a pickup, with an increase in 5G capex. s Growing data-consumption has spurred the demand for data centres in India providing opportunities for the W&C industry. Solar industry is rapidly growing worldwide. This will also drive demand for solar cables which will drive the wires and cables industry to a more sustainable future.

Shift toward branded play

Domestic wire and cable industry , including FMEG, is pivoting towards branded play As of FY23, branded players have nearly 70% of the market share in terms of value of the W&C market in India. Within this 70%, five leading players Polycab, KEI, Havells, Finolex and RR Kabel, garner approximately 60-62% market share and the balance 38%-40% is constituted by challenger brands like Syska and V-Guard. The share of branded play in the domestic W&C and FMEG industry has grown from 60% in FY15 to around 70% in FY22 and is projected to reach approximately 82% by FY27.

Although fluctuating commodity prices and the impact of competition on pricing remain concerns, the long-term outlook for India’s wired future continues to shine bright. In conclusion, the sector catalysts remain robust; however, investors may need to be selective and avoid potential value traps, especially in stocks with a regulatory overhang.

Girish Bhise is the founder and CEO at ValueAdd Research and Analytics Solutions.