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Gravita India – Recycling Story Driven By ESG Investments' Tailwind


Company NameGravita India Limited (Gravita India)


Current Share Price – INR 472 (March 3, 2023)


Market Cap – INR 3,258 cr


 

1. What is interesting about the stock?

Recycling has been practiced for thousands of years, though the concept has evolved. A brief overview of the history of recycling:

  • Ancient civilizations: Archaeological evidence shows that ancient civilizations, such as the Romans and Greeks, recycled metals, glass, and paper. They melted down metals to make new items, ground glass into new products and reused paper by writing on the other side.

  • Industrial Revolution: During the Industrial Revolution in the 19th century, recycling became more formalized as materials such as scrap metal and rags were collected and reused in manufacturing processes.

  • World War II: The shortage of raw materials during World War II led to widespread recycling efforts, as people were encouraged to donate items such as scrap metal, rubber, and paper for the war effort.

  • Modern recycling: In the 1960s and 1970s, environmental awareness increased, leading to the modern recycling movement. The first Earth Day in 1970 helped to raise awareness about environmental issues, including the need to reduce waste and conserve resources.

Metal is one of the commodities which is typically recycled as it would help with:

  • Conservation of natural resources: Recycling metals reduces the need for mining virgin ores, which can be environmentally damaging and deplete natural resources. Recycling metals conserves natural resources by reducing the need for raw materials and energy-intensive processes.

  • Energy conservation: Recycling metals requires less energy than producing new metals from raw materials. For example, recycling aluminum requires 95% less energy than producing new aluminum from bauxite ore.

  • Reduction of greenhouse gas emissions: Recycling metals can reduce greenhouse gas emissions by reducing the energy required to produce new metals. The production of new metals from raw materials can generate significant greenhouse gas emissions.

  • Economic benefits: Metal recycling can provide economic benefits by creating jobs in the recycling industry and reducing the cost of raw materials for manufacturers.

  • Waste reduction: Metal recycling reduces the amount of waste that ends up in landfills or incinerators. Recycling metal also reduces the need for new landfill sites and incinerators.

Where does scrap in India or Africa go to die (recycled)? Earlier lead, now aluminum and plastic, and later even rubber, steel, and lithium. One of the correct answers would be any of the plants of Gravita India. Maybe, you will see your EV getting completely recycled at a Gravita India plant in about 5 years.


Gravita India Limited is one of India’s largest Lead-recyclers with an 18% share of the organized market, as well as a significant presence in Sri Lanka and Africa (Ghana, Mozambique, Senegal, and Tanzania). Africa accounts for 30% of revenues but 60% profits of the Company. The Company currently has a capacity of 228k metric tons per annum which is being increased to 425k metric tons by 2026.


The key to the recycling business is sourcing and collecting scrap in bulk. The Company has been operating in Africa since 2007 and is expanding capacity with new plants in Ghana, Mozambique, and Togo to expand capacity by ~19 ktpa of lead recycling and ~29 ktpa of non-lead recycling in the next few years. This distributed recycling plants model with a capacity near the ports and user industries like battery manufacturers helps the Company in managing sourcing from multiple countries and logistics costs effectively.


Scrap collection is done through 4 main routes:

  • toll recycling or buying used battery lead from OEMS, recycling it, and selling it back to them,

  • institutional procurement,

  • imported scrap from 70+ countries, and

  • localized sourcing.

Even though the lead industry is seeing very slow growth (~3%), the share of recycled lead is growing significantly faster at 25% per annum, thereby providing industry tailwinds to the Company.


Company is looking to enter into new verticals by 2026 - Rubber, Lithium, Copper & Paper and is targeting revenue and profit CAGR growth of 35% with ROCE of more than 25%.


Why invest in Gravita India?


The key investment arguments summarized would be:

  • 18% market share in India in the fast-growing organized recycling business; strong relationship for sourcing

  • Faster growth in plastics and aluminum to diversify beyond lead, and further diversification initiatives into rubber, steel, copper &brass, paper, and lithium e-waste

  • Stricter safety/environment norms leading to the formalization of the recycling industry would help strong incumbents

  • Major capacity expansion in different stages across India and Africa, to come on stream in the next few years

  • Experienced promoters with 30 years of recycling experience

2. Key Historical Financials

3. What is my view on company valuation?


For INR 472 per share, the trailing twelve months’ P/E ratio is ~18x, which is reasonable in the current market. As ESG investments gain more steam, well-managed recycling businesses like Gravita India are likely to see much more institutional interest and that will help the valuations of the Company.


If one assumes that the Company’s expansion plans will come onstream without significant delays and cost overruns, the Company’s growth rate of 20-25% over the next 3-5 years would still be significant enough to see the Company’s P/E ratio stay stable, apart from the organic growth in profitability. However, the ROCE and ROE in FY22 were high and may not be sustainable at this level.


The stock looks attractive for the long term and should be evaluated by investors.


4. What are the risks to the investment analysis?


Key risks to the analysis are:

  1. Low cash flow convertibility (CFO to EBITDA ratio) – became worse in FY22

  2. Volatility in volumes and margins led by commodity prices

  3. Project delays in the commissioning of new capacities

  4. Changing safety/environment regulations across countries it operates in, could impact profitability

 

About the Author


I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


Biased


I have had the stock, option, or similar derivative position in any of the companies mentioned for the last 30 days, but I will not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.


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