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Pioneering India's recycling revolution!

Gravita India (Gravita) is one of the key players in the growing recycling industry in India. The company is primarily engaged in recycling lead (~88% of revenue in FY24), aluminum (~8%), and plastics (~2%). Additionally, it offers turnkey solutions to its customers, assisting them in setting up recycling plants.

* Gravita’s core business of lead recycling is expected to sustain the strong revenue growth momentum (at ~21% CAGR over FY24-27), fueled by favorable regulatory changes and the formalization of the sector (BWMR, 2022).

* However, the other key business segments, such as Aluminum and Plastic, are expected to report a much higher revenue CAGR of ~49% and 52%, respectively, propelled by changing business scenario due to the introduction of new hedging mechanisms and stricter implementation of regulatory policies (such as the Plastic Waste Management Rule; PWMR).

* The company is incurring a significant capex of over INR6b (INR4b for the existing segments and INR2b for the upcoming segments, like Lithium ion, Steel, and Paper) on the existing gross block of ~INR4.8b to more than double the capacity over the next three years (~686K MTPA by FY27 vs. ~303K in FY24).

* We believe that with strong industry tailwinds, favorable regulatory policies, the availability of additional hedging mechanisms, and the absence of significant supply chain disruption, Gravita can ramp up the utilization materially (driving ~30% sales volume CAGR over FY24-27E).

* Further, Gravita enjoys multiple competitive advantages, such as strategically located manufacturing units, a deep procurement network, a diverse global customer base, and lower costs for building new facilities (through the in-house turnkey division). These advantages provide long-term growth visibility.

* We estimate Gravita to register a revenue/Adj. EBITDA/Adj. PAT CAGR of 26%/ 29%/31% over FY24-27. The stock currently trades at 31x/23x FY26E/FY27E EPS, with an RoE/RoCE of 30%/25% in FY27. We initiate coverage on the stock with a BUY rating and a TP of INR2,350 (based on 35x Sep’26E EPS).

* Key downside risks: 1) supply chain issues and logistic disruptions, 2) unfavorable regulatory changes, 3) a delay in the ramp-up of new facilities, and 4) volatility in commodity prices where the company has not fully hedged.

Lead recycling business to continue leading from the front

* Gravita commenced its lead recycling business with its first plant in Jaipur in CY94. Currently, it is the largest vertical (~88% of FY24 sales) and has been leading the growth trajectory (~21% revenue CAGR) during FY19-24.

* The margins were volatile in the initial years due to fluctuations in commodity prices. However, currently the company is hedging its entire position in the lead segment (including the core inventory), thereby eliminating any commodity price risk

* In order to secure its share in the massive and fast-growing global lead recycling market (valued at ~USD5.8b in CY23, with ~9.2% CAGR over CY23-32E), Gravita has been constantly increasing its manufacturing capacity (~237KMT in FY24 v/s 125KMT in FY21; further likely to rise to ~350KMT by FY27).

* Further, the demand for recycled lead is expected to rise at a higher pace in India (as of FY24, ~72% of Gravita’s total lead recycling capacity is located in India), fueled by the Battery Waste Management Rules (BWMR), 2022 which mandate the minimum use of recycled materials in new batteries (~40% for Automotive/ Industrials by FY28 and ~20% for EV/Portable batteries by FY31).

* Further, BWMR, 2022 is based on the concept of Extended Producer Responsibility (EPR), where producers have an increased responsibility for the collection and recycling of end-of-life batteries. This leads to higher domestic scrap availability for the organized players. The automotive battery manufacturers are likely to collect and recycle ~70%/90% of batteries by FY25E/FY26E that were placed by them three years ago (up from ~50% in FY24).

* The strict implementation of BWMR in 2022, coupled with the proposed Reverse Charge Mechanism under GST for ‘end-of-life batteries’ (where the buyer of scrap is expected to pay the taxes), can lead to formalization of the sector. This could rapidly reduce the share of unorganized players (who currently hold over 60% of the market share in India), significantly benefitting organized players such as Gravita.

* Factoring in the tailwinds from regulatory changes, formalization of the sector, and strong industry demand, we expect Gravita’s lead recycling business to experience ~21% revenue and EBITDA CAGR (each) over FY24-27.

New and upcoming segments to boost the growth trajectory

* Gravita has leveraged its experience and expertise in lead recycling to enter other verticals such as plastic (in CY15), aluminum (in CY16), and rubber (in CY22; used for captive consumption).

* The aluminum segment (~8% of revenue in FY24) witnessed a revenue decline in FY23/FY24 as the company tried to avoid the high risk of metal price fluctuations during the period due to the lack of hedging mechanisms.

* Going forward, an aluminum alloy derivative is likely to be launched by MCX over the next few months, providing an additional hedging mechanism. This, coupled with a strong capacity addition (~73K MTPA by FY27 v/s ~30K MTPA in FY24), will significantly boost the volumes within the segment (~49% revenue CAGR likely over FY24-27E).

* Similarly, the declining realizations and logistic disruptions have adversely impacted the plastic recycling segment (~2% of revenue in FY24). However, stricter implementation of the PWMR is likely to aid growth within the segment (~52% CAGR over FY24-27E).

* Apart from this, the company expects to enter other new verticals such as lithium-ion (a pilot project to start in FY26), steel, and paper (manufacturing facility for both to start by FY27). Gravita has allocated over INR2b of capex for these upcoming verticals during FY25-27E.

* Accordingly, with robust growth in the new segments and the addition of the upcoming segments, the share of new and upcoming segments is likely to rise to ~23% by FY27 (from ~12% in FY24), fueled by robust 58% CAGR over FY24-27E.

Multiple moats provide long-term visibility

* Gravita boasts over three decades of recycling experience and operates 11 strategically located manufacturing facilities globally (five each in India and Africa, and one in Sri Lanka). The new facilities are also coming up in Oman and the Dominican Republic. Strategic placement of these facilities near the regions of consumption and procurement provides a competitive edge.

* Gravita has a robust procurement network with over 1,700 touchpoints and ~31 own yards for scrap storage across Asia, Africa, the Middle East, Europe, and America. This global presence facilitates cost-effective raw material procurement by leveraging commodity price differences.

* Further, over the decades, Gravita has developed a diversified customer base, serving more than 350 customers in 32 countries, including over 240 domestic customers across 22 states of India.

* Apart from this, Gravita also offers turnkey solutions through its proprietary inhouse recycling technology, achieving ~25% margin. This underscores its capability to construct cost-efficient manufacturing facilities, resulting in higher returns on investments and shorter payback periods.

Strong earnings and declining working capital to improve cash flows

* Going forward, Gravita is expected to compound its earnings at ~31% CAGR over FY24-27, aided by strong revenue CAGR of ~26% and improving adjusted EBITDA margin (~11.2% in FY27 vs. ~10.5% in FY24) due to favorable operating leverage.

* Net working capital days are expected to decline to 84 days by FY27 (from 108 in FY24), led by higher availability of domestic scrap resulting in significant improvement in cash flows from operations (CFO/EBITDA projected to improve to 52% in FY27 from 36% in FY24).

* RoCE is likely to remain stable at ~25% in FY27, with RoE to moderate to 30% in FY27 (vs. 33.5% in FY24) led by financial deleverage (net debt-to-equity ratio to contract to ~0.2x by FY27 from ~0.5x in FY24).

Set to thrive in a growing recycling industry – Initiate coverage with a BUY

* Gravita is one of the key players within the growing recycling industry in India. Going forward, we expect the company to report robust earnings growth on the back of: 1) strong growth within the lead recycling segment led by favorable regulatory changes; 2) faster growth from the new segments (aluminum and plastic) and addition of the steel and paper segments; 3) robust capacity addition across segments; and 4) a rise in the mix of value-added products.

* We estimate Gravita to register a revenue/Adj. EBITDA/Adj. PAT CAGR of 26%/ 29%/ 31% over FY24-27.

* Gravita currently trades at 31x/23x FY26E/FY27E EPS with an RoE/RoCE of 30%/25% in FY27E. We believe that the company will be a key beneficiary of the growing recycling industry in India and is poised to secure its share within the market led by multiple moats built around over the years. We initiate coverage on the stock with a BUY rating and a TP of INR2,350 (based on 35x Sep’26E EPS).

* Key downside risks: 1) supply chain issues and logistic disruptions, 2) unfavorable regulatory changes, 3) a delay in the ramp-up of new facilities, and 4) volatility in commodity prices where the company has not fully hedged.

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