Buy Gravita India Ltd For Target Rs.380 - Emkay Global
Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel
https://t.me/InvestmentGuruIndiacom
Download Telegram App before Joining the Channel
A recycling major in the making; Initiate with Buy
* Gravita is one of India’s largest Lead-recyclers with an 18% share in the organized segment. However, Africa is its crown jewel (comprising Ghana, Mozambique, Senegal, Tanzania), accounting for >60% of consol. PAT, even with a ~30% share of total revenues.
* Revenue growth is likely to accelerate to 25% CAGR in FY21-26E from 15% in FY14-21, driven by both Lead (17% vol. CAGR) and Non-Lead (35%). Non-Lead should contribute 44%/35% of incremental vol./revenue in FY21-26E, doubling its share in revenues to 28%.
* India business (16% Lead volume CAGR) will be driven by stricter safety/environment norms and GST compliance, while Overseas (16%) by capacity expansion. RoIC is set to cross 20% in FY22E (vs. 7-17% in past), touching 23-24% in the next two years, driven by higher overseas revenue share and better India profitability (Mundra plant commissioned).
* Our Mar’23E SOTP TP of Rs380 comprises Rs330/share from the current business (DCFbased, modeled in our forecasts) and Rs50/share from new ventures (50% of implied fair value at ~8.5x FY26E P/E). We initiate coverage with Buy.
Profitable overseas business; India scale-up aided by regulatory tailwinds: Gravita enjoys a dominant position (~60% share of scrap collected) in its African operations, where it is further expanding capacity. Africa profitability (RoIC) should improve further from current 20%+ levels, with the expansion in Aluminum and Plastics recycling in its existing facilities. In India, the stricter implementation of battery recycling regulations (covering 90% of batteries vs. 30% in FY21) and also of GST regime, should boost the share of organized sector to 75% by FY26E from 30% in FY21. Wider scrap availability should help optimize logistics and working capital as well. Further, the increase in toll-recycling volumes in partnership with Indian battery OEMs should boost RoIC, given the low working-capital needs in this segment.
Revenue and profit CAGR of 25%/39% in FY21-26E, and expansion in return ratios: We forecast a 22% sales volume CAGR, driving Revenues to 3x in five years (by FY26E) and Profits to 5x. We expect a modest increase in the EBITDA margin. EBITDA/ton is likely to be USD200 in FY22 (+38% yoy), and may sustain there over medium term; we note H1FY22 EBITDA/ton was already >USD185. Further, consol. RoE is likely to improve from 10-23% in the past to >30%. We model net debt to rise from Rs2.4bn in Mar’21, and peak at Rs3.9bn by Mar’23E, based on growth outlook for the existing business; the peak net debt may turn out higher if Gravita expands into new recycling areas such as Rubber, Copper, Steel and Paper.
Initiate coverage with a Buy rating and a Mar’23E TP of Rs380: Our TP comprises Rs330/share from the current business (explicitly modeled in forecasts), and Rs50/share from new businesses. We estimate potential for Rs1bn+ PAT from new ventures in FY26, requiring incremental investment of Rs5.5bn. Key downside risks: 1) Volatility in volumes/margins led by commodity prices - hedging strategies plus an increase in the share of value-added products would help mitigate this risk; 2) project delays; and 3) adverse regulations.
To Read Complete Report & Disclaimer Click Here
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
Above views are of the author and not of the website kindly read disclaimer
