IGI Logo

Turning trash into triumph, globally

Gravita India Ltd (Gravita), one of the largest recycling companies in India, is wellpositioned to benefit from strong industry tailwinds and healthy traction within the sector. Its Lead recycling vertical, which accounted for ~88% of revenue in FY24, is expected to achieve significant growth in the domestic market due to favorable regulatory changes. Additionally, the expansion of its geographical reach and product portfolio will be key drivers of its international business.

* Gravita is well poised to benefit from the recent favorable regulatory changes implemented this month. The introduction of Environmental Compensation (EC) for non-compliance with Extended Producer Responsibility (EPR) targets, along with the Reverse Charge Mechanism (RCM) under GST for metal scrap, is likely to improve the availability of domestic scrap for the organized recycling industry.

* Further, Gravita’s subsidiary has executed a Memorandum of Understanding (MOU) to acquire an 80% stake in a ~17,000 MTPA waste tyre recycling facility in Romania for INR320m. The remaining 20% will be held by other partners based in Romania.

* Gravita’s entry into the European recycling market has significantly expanded its total addressable market (TAM), with the European total waste recycling market valued at ~USD155b as of CY22. The strong geographical and product portfolio expansion will be its key growth lever going forward.

Regulatory tailwinds to boost domestic scrap availability

* The Central Pollution Control Board (CPCB) has introduced EC for lead acid batteries of INR18 per kg for non-compliance of EPR targets according to the battery waste management rules (BWMR), 2022.

* This penalty/compensation on non-compliance would ensure timely compliances by the battery manufacturers, resulting in higher collection of batteries and improved demand within the battery recycling space.

* In addition, the GST Council has introduced RCM on metal scrap recently, which is a huge boost for the organized recycling industry players.

* Earlier, the organized players were not able to procure from unorganized small-scale suppliers as they were not able to claim input credit on GST paid by them due to the non-compliance by such vendors.

* However, with the introduction of RCM, companies can directly pay the GST themselves. This will ensure higher availability of domestic scrap for the organized recycling companies.

* The ease in availability of domestic scrap aids in reducing higher freight costs incurred by the recycling companies and also reduces the working capital requirement due to lower transit days for inventory (imported inventory requires a higher transit period, thus increasing the inventory days). This, in turn, improves the return ratios for the companies.

* Gravita, being a large-scale recycler with a Pan India presence, will be a key beneficiary of these favorable regulatory changes within the industry.

Diving into the European market: A small step that could lead to a giant leap!

* Gravita’s step-down subsidiary, Gravita Netherlands BV (GNBV), has executed a MoU to acquire an 80% stake in a ~17,000 MTPA waste tyre recycling facility in Romania for INR320m.

* This acquisition will be carried out by forming a separate SPV where GNBV will hold an 80% stake (along with management control) and the remaining equity will be held by other partners based in Romania.

* We believe this acquisition is an initiative by Gravita to expand its recycling business across the larger European market, leveraging new market opportunities and establishing strategic partnerships to drive growth.

* Accordingly, with this first recycling plant in Europe, the company has significantly expanded its TAM and unlocked new growth avenues.

* Europe’s tyre recycling market was estimated at ~USD871m in CY23 and is likely to reach USD1.2b by CY33 (clocking ~3.3% CAGR over the period).

* According to industry reports, the European waste recycling market size stood at ~USD155b as of CY22. Moreover, the European Recycling Industries Confederation (EuRIC) states that only ~39% of the collected waste is recycled in the EU, with ~32% recyclable waste being landfilled or incinerated. This underscores a significant scope of growth within the market for the existing as well as new players.

* Going forward, we expect the company’s strong geographical (upcoming facilities in the US and Oman) as well as product portfolio (entering into steel, paper, and lithium ion) expansions will be a key growth lever.

Valuation and view

* Gravita is one of the key players within the burgeoning 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 fueled by favorable regulatory changes; 2) faster growth from the new segments (aluminum and plastic) and addition of the steel & paper segments; 3) robust capacity addition across segments; and 4) an improvement in the mix of valueadded products.

* We increase our EPS estimates by 5%/7% for FY26/FY27E. We expect a revenue/EBITDA/PAT CAGR of 30%/32%/34% over FY24-27. We value the stock at 40x Sep’26E EPS to arrive at our TP of INR2,900. We reiterate our BUY rating on the stock.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412