Gravita India – recycling story driven by ESG investments' tailwind

Updated: Feb 15


Company NameGravita India Limited (Gravita India)


Current Share Price – INR 251 (December 22, 2021)


Market Cap – INR 1,730 cr


 

1. What is interesting about the stock?

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 significant presence in Sri Lanka and Africa (Ghana, Mozambique, Senegal and Tanzania). Africa accounts for 30% revenues but 60% profits of the Company. The Company currently has a capacity of 99 ktpa for lead recycling and 24 ktpa for non-lead recycling in India, and 40 ktpa for lead recycling and 20 ktpa of non-lead recycling abroad. In India, the Company is almost doubling its lead and aluminum recycling capacities and growing its plastic recycling capacity by ~5x in the next 5 years.


The key to the recycling business is sourcing and collection of 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 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.


Why invest in Gravita India?


The key investment arguments summarized would be:

  1. 18% market share in India in the fast-growing organized recycling business

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

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

  4. Major capacity expansion in different stages across India and Africa, to come onstream in the next few years

  5. Experienced promoters with 30 years of recycling experience

2. Key Historical Financials

3. What is my view on company valuation?


At a price of INR 251 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.


Stock looks attractive for 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 CFO to EBITDA ratio – FY20 and FY21

  2. Volatility in volumes and margins led by commodity prices

  3. Project delays in commissioning of new capacities

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

 

About the Author


I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in 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


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall 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 purpose and not to be construed as an 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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