Kotak Institutional Equities has issued a 'Sell' rating for three prominent players in the wires and cables (W&C) sector: Polycab India Ltd, R R Kabel Ltd, and KEI Industries Ltd. The brokerage firm's cautious stance stems primarily from what it perceives as full valuations for these stocks, coupled with significant downside risks to profitability.
Key Concerns Driving the 'Sell' Rating
According to Kotak, the primary reasons for the 'Sell' recommendation include:
- Full Valuations: The current market prices of these stocks fully reflect future growth, leaving little room for further upside.
- Commodity Price Risk: A potential correction in commodity prices could negatively impact the profitability margins of W&C companies.
- Increased Competition: The anticipated entry of UltraTech into the wires and cables segment, expected by mid-August 2026, is likely to challenge pricing discipline across the industry.
Despite the 'Sell' ratings, Kotak acknowledges the W&C sector's robust growth potential, projecting it to expand at 1.5 times the real GDP growth, consistent with historical trends. The firm forecasts a 10 percent volume CAGR for the industry between FY2026-29, driven by 9 percent domestic growth and a significant 20 percent growth in exports.
Demand Drivers and Potential Headwinds
Kotak highlights several tailwinds for the sector, including increasing exports, growth in data centers, private sector capital expenditure, and an expected step-up in power transmission projects, particularly with the preference for underground lines benefiting EHV cables. However, the report also points to potential moderations in demand momentum from power generation/distribution and government capital expenditure in infrastructure.
Significant capacity additions by both incumbent players and new entrants could lead to margin compression. While this supply is expected to be absorbed over time if industry growth remains strong, it poses an immediate challenge to profitability.
Fair Values and Outlook
Kotak has set fair values for the rated companies: Rs 4,200 for KEI Industries and Rs 1,850 for RR Kabel. For Polycab, the target multiple was raised to 33 times June 2028E PE, resulting in a fair value of Rs 8,700, aligning with long-term industry forecasts and the company's standing.
The firm notes that while private sector capex newsflow is mixed, W&C companies are reporting a pickup in demand. Historically, power transmission has been a low contributor to W&C demand, but planned capex increases are set to change this. Earlier demand acceleration (FY2021-24) was fueled by government capex, whereas FY2026 growth was boosted by renewables capacity and DISCOM capex. Near-term headwinds include a slowdown in government capex, a high base in renewables/DISCOM capex, and a potential lag impact on wires demand from declining new real estate launches.