Smallcap Proxy on Realty and Infra Cycle 

Roti, Kapda aur Makaan.. are our basic needs.

In India, while the first two are still affordable, the same can not be said about third.

Having one's own house is a common dream for most in India.

With urbanization, rising income and affordability and increasing trend of nuclear families, there are structural positives for housing demand in India.

What's also adding tailwinds to it is the policy push by the government - Housing for all and focus on infrastructure.

The real estate business seems to be in for a good time. And this is quite evident in the way realty index has moved, beating the Sensex handsomely in last one and a half year.

Now one way to play this is to bet on real estate and construction companies involved in residential housing.

And indeed, a lot of money has been made on such bets.

But in these markets, one needs to be careful.

For one, stocks at an overall level are expensive.

Second, real estate is a cyclical industry.

The downcycles can be brutal and long.

Hence, be mindful of balance sheet quality, cash flow health and margin of safety in valuations.

But this checklist indeed limits the investible opportunities when it comes to direct bets.

Well, here is the good news.

To play the upcycle, without getting burnt, you need not limit your options to direct bets.

For trends in house sales is a leading indicator for other industries. A new house purchase or construction is likely to be followed by fresh demand for these products Think of paints, furniture, consumer durables (electronics, televisions, refrigerators, air conditioners and washing machines etc), tiles, wires and cables, smartmeters/energy meters and so on.

This offers a great opportunity to use proxy investing to diversify your bets on this trend.

In my recent articles, I have shared about the ecosystem of these industries benefitting from real estate and infra revival - proxy bets on the rise of electronics (AC/washing machines, domestic appliances) and on smart meter theme.

Today, I want to share such proxy plays for cables and wires industry.

The players in this cable industry have reported median sales growth and profit growth of over 25%.

Not just real estate, but overall capex and infra investment - railway, telecom, transmission sector, data centers , renewable energy, bodes well for the cable and wire industry.

The management of KEI Industries has guided for a growth of 16%-17%, RR Kabel's management is expecting healthy domestic business and 20% growth in the exports, Apar Industries' management expects over 25% growth in the cable segment. You get the picture.

Overall, Indian cable industry is expected to grow at two times of domestic GDP.

While cable and wires industry is a good proxy to infra and housing capex, it would be good to dig deeper into this industry's ecosystem.

Consider DDev Plastiks.

The company makes cable compounds and plastic compounds that are used in cable and wire, packaging, footwear, pipes, automobiles, consumer durables, electrical appliances, electrical and light fittings and electronics.

Its clients include the likes of KEI Industries Ltd, Finolex Cables, Anchor, Torrent Power, Havells India Ltd, Apar Industries Ltd, KEC International Ltd, etc, making it a good proxy play for cable and wire industry growth.

70% of its revenue is from domestic sales. Apar, Havells, KEC, KEI, Paramount and Polycab contribute to ~22% of total revenue.

By FY30, the management is targeting revenue of Rs 50 bn, versus Rs 24 bn in FY24 . The planned capex is Rs 3 bn over next 3 years.

In last five years, the revenue and net profit have grown at a compound annual growth rate (CAGR) of 9% and 60% respectively.

The company claims ~50% market share in Sioplas and ~33% in XLPE compounds. Both are used in cable industry.

The management has been focusing on value added products.

DDev is also among the two producers of halogen free flame retardant in India. It is a higher margin product, expected to replace PVC house wiring cables. Unlike conventional cables, it has stronger insulation, does not create smoke, avoids suffocation and allows visibility in case of fire accidents. As such, it is supported by the government to be used to public places like malls, metro stations, schools and hospitals.

It is also launching products that are suitable for insulation of high voltage cables. In fact, it is the only domestic player manufacturing coating compounds for 132 KV cables, with rest being imported.

The balance sheet is net debt free.

The return on capital employed was 40.6% for FY24. The current price of the stock is 19 times its profits in last 12 months.

Do note that this discussion does not imply any view on the stock.

One needs to be mindful of the risks related to competition from global players, raw material price and exchange rate volatility.

However, given the prospects for cable industry, it makes sense to make this company a part of the watchlist.

With this, I have come to the end of this video. Do press the like button if you find this video useful. And share your feedback in the comments section.

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Thank you for watching. Goodbye