Recommendation from Metals - Non Ferrous Company

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

GRAVITA INDIA LIMITED : MAKING LARGER FOOTPRINTS GLOBALLY

HERE IS WHY
✓Increasing market share
✓Profitable diversification
✓Capacity Expansion on the anvil

Climate change over the last couple of years has been rapid and intense. It has thus become a matter of grave concern for governments across the world as well as investors. Given this scenario, companies working towards mitigating the effects of climate change have the potential of attracting better valuation and inflows. One such company is Gravita India (GIL), dedicated to lead and lead products that are produced through an environment-friendly process. GIL is engaged in the business of manufacturing lead metal by recycling and smelting and other lead products. The product range of the company includes pure lead ingot, lead alloys, etc

The company has recently diversified into aluminium and plastic recycling and is planning to further diversify into rubber, steel, copper and paper. Lead manufacturing contributes around 87 per cent of its revenue. Its major domestic scrap collection partners include Amara Raja, ATC India, Indus Towers, Tata Group, Reliance Industries, V-Guard and Asian Paints, among others. The company is a leader in the organised lead recycling space in India with an 18 per cent market share and 4 per cent share in the overall lead market

Gravita India has recycling plants located in India and offshore, majorly in Africa, which offers it a competitive advantage. It now has an overall share of around 60 per cent in scrap sourcing in the countries it operates with 30 per cent in Ghana and more than 85 per cent in others. Its African business has tax exemption with virtually zero tax till CY 2028-29. Mozambique, Senegal and Tanzania fall under the least developed countries (LDC) category and hence 80-85 per cent of re-melted lead (RML) produced there is imported to India and is duty-free while it is 5 per cent for other countries.

Currently, the company’s India business contributes 64 per cent to FY22 sales and going forward it’s expected that the Indian business and offshore business will be contributing in the range of 60-65 per cent and 35-40 per cent, respectively. It has a pan-India presence. What differentiates GIL from its competitors is its sourcing network, strategic locations, logistics management, corporate tie-ups and strong OEM relationships, which are key differentiators

They are not easy to replicate for a new entrant and one needs to go through the learning curve. GIL is not hedged for its aluminium division which makes its EBITDA margin profile a bit volatile compared to lead. Aluminium and plastic comprise up to 16-17 per cent of the total revenue share and this is expected to reach 25 per cent in the next 2-3 years. The company is also considering capacity expansion by establishing new plants which can further increase its revenue. 

This expansion strategy will take the total capacity from all divisions to 425,000 TPA from the existing 213,719 TPA with 1.98 times expansion till FY26. This will entail a total capex of ₹312 crore of which 65-70 per cent will be in India and the rest in international locations. GIL will incur capex of ₹60-70 crore annually till FY26. The company has an outstanding asset turnover of 8-9 times. This clearly shows the company’s growth potential. Currently, the shares of GIL are trading at a PE of 18.6 times with strong return ratio of more than 30 per cent. Looking at its fair valuation and high growth potential, we recommend BUY.