Buy Gravita India Ltd For Target Rs.445 - Emkay Global Financial Services
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Regulatory nudge to scale up domestic recycling; annual report reiterates Vision 2026
? Govt of India (GoI) has notified the Battery Waste Management Rules 2022 (BWMR) in August which expands the scope of the earlier Battery Management & Handling Rules 2001, to include all types of batteries (incl. EV & portable), further organize process flows (centralized registration & filings) and deepen implementation. The draft BWMR was released in CY20 and the notification affirms the GoI’s commitment to a circular economy.
? BWMR specifies that extended producer responsibility (EPR) can be discharged either completely by the battery maker or through purchase of surplus EPR certificates, while non-fulfilment would lead to compensation-penalty. It has stated recyclers as a dedicated agent, although the ultimate responsibility of waste management lies with the producer.
? Within normal auto batteries, BWMR sets the recycling target for FY23 at 30% of the units sold in FY20 (3-year lag), but quickly raises it to 50%/70%/90% for FY24/25/26. While on expected lines, it is, nevertheless, positive for the recycling eco-system and, Gravita being a top player, would see benefits from the higher domestic scrap availability.
? Gravita’s FY22 Annual Report (AR) reiterates its Vision 2026 through key strategic initiatives, namely build new recycling verticals, viz. rubber, copper, paper, e-waste and lithium; achieve 25%+ revenue CAGR, 35%+ profitability growth and 25%+ ROCE; garner 25%+ non-lead business share; and attain a portfolio mix of 50%+ value-added products.
? The Chariman’s speech in the AR has pointed to high competitive entry barriers in the business, led by factors such as specialist knowledge needs, long gestation to secure OEM approvals, multi-national procurement and customer network, government licenses for imports, etc. Gravita’s focus on ESG was reflected in its domestic scrap collection priority, tracking resource usage in operations, utilizing solar energy in plants and the newly set-up rubber vertical, providing in-house furnace oil and charcoal briquettes.
? The AR quotes market research firm IMARC projecting the global lead-aluminum recycling market CAGR at 6.8% over 2022-27 to 44mn tons by 2027, while forecasting plastic to grow by 7.5% to 111mn tons. India is expected to witness faster growth, at 9% and 8.6%, resulting in market size of 3.8mn tons and 4mn tons, respectively, by 2027. In FY22, among major overseas subsidiaries, Recyclers Ghana/Gravita Tanzania/Navam Lanka/Gravita Senegal saw PAT jump 8x/2.7x/2.1x/3x to Rs334/243/189/162mn, while Mozambique’s was lower. Nicaragua also swung back to logging profit of Rs82mn.
? We slightly adjust our FY23-25E consol. EPS due to updates in the AR figures, with tweaks in operating costs. Our DCF-based TP is marginally up by ~4% to Rs445, to include the revised earnings outlook and minor improvement in the WC cycle. We remain upbeat on the strong volume outlook and optimization, and reiterate our Buy rating for Gravita.
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