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GRAV’s Q2FY23 adj. revenue was up 26% YoY at Rs6.9bn, while PAT (after minority interest) grew by 21% to Rs446mn, with H1 run-rate largely in line with our expectations for the year. Sequentially, gross profit declined 13% as Q1 had exceptional arbitrage opportunities in the domestic market and the Sri Lankan crisis affected operations in the island in Q2. Opex however fell, leading to largely flat adj. EBITDA of Rs642mn (up 28% YoY). EBITDA margin moderated to the guided ~9% level or Rs16k/ton+, with equivalent reduction across the three core segments. Total volumes grew by 17% YoY/24% QoQ. However, for GRAV, the positive surprise in Q2 was the sizable reduction in net debt, from Rs3.5bn to Rs2.7bn HoH, on the back of strong FCF of Rs1.1bn, supported by reduction in net working capital cycle from 83 to 66 days (based on our calculation), mainly on the drop in inventory by 16 days. Management maintained its upbeat tone, with capacity additions and scrap availability driving volumes along with improving efficiencies and balance sheet. We maintain our earnings estimates and retain Sep-23E DCF-based TP at Rs445/share. Reiterate BUY.

Results summary: Revenue at Rs6.88bn was up 26% YoY/10% QoQ. Sales volume growth was 17% YoY/24% QoQ at 39.5kt. Volumes of lead were up 16/26%, of AL up 70/31%, while plastic volumes were down 10% YoY/up 11% QoQ. Book EBITDA/ton was up 10% YoY, but fell 19% QoQ to Rs16.2k. Reported lead, AL and plastic EBITDA/ton fell by 19-22% each QoQ. Opex/ton also declined, by 10% YoY/38% QoQ. Finance cost fell 8% QoQ to Rs99mn, while tax rate was at 10%. Segment EBIT for lead/AL/plastic grew 3%/14%/23% YoY and 5%/11%/10% QoQ to Rs506/59/36mn. Turnkey EBIT came in at Rs14mn for Q2 vs. Rs1mn in Q1 and at a loss YoY. Capex for H1 was Rs440mn vs. Rs728mn in FY22. What we liked: Reduction in debt, lower working capital cycle and opex management. What we did not like: Fall in gross margins QoQ.

Management guidance: Company reiterated its annual volume growth guidance of 25%, with revenue of Rs27-30bn in FY23. It has increased its lead capacity by 6% in H1 to 168ktpa and targets total capacity of 425ktpa including all verticals by FY26. The recent AL capacity addition of 4ktpa in Senegal is expected to yield Rs600mn annual revenue at ~20% gross margins. Phase 1 of the plastic recycling plant in Ghana has also commenced, with capacity of

1.2ktpa and plans to touch 2.7ktpa at the end of phase

2. Capex guidance for H2 stands at Rs600-700mn, while annual capex (all verticals) till FY26 is planned at Rs700-800mnpa. Energy issues in the US and EU present better demand opportunities for GRAV’s products. Plastic recycling norms are yet to be notified, while the recent battery waste management rules are expected to formalize the sector, as implementation becomes focused. Sale of recycling certificates could be an additional revenue source. Currently, lead comprises 83% of the mix, and is expected to go down to 75% by FY26. Company plans to start a new AL processing plant in Togo, in Q3. Domestic scrap collection rose to 47% in Q2 vs. 39% in Q1.

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