Expansion In Tire Recycling And Sustainability Efforts Will Strengthen Future Prospects

Key Takeaways

• Strategic cost management and operational efficiencies are set to enhance margins through pricing stabilization, product optimization, and automation benefits.
  
• Expansion in sustainability-driven ventures and new revenue streams in recycling and carbon black are poised to fuel future growth and earnings.
  
• Reliance on pilot production and fixed pricing contracts, alongside imported raw materials, threatens margins and revenue growth due to elevated costs and approval delays.

Catalysts

Manufactures and sells reclaimed rubber products for tyre and non-tyre rubber goods in India and internationally.

• GRP is expected to stabilize and revert pricing for customers starting January 1, which should help offset the rise in raw material costs and positively impact gross margins.
  
• The strategic optimization of product mix and operational efficiencies through automation and energy savings are likely to enhance margins by reducing workforce and energy costs, improving net margins.
  
• GRP’s announced CapEx plan, supported by funding from French DFI Proparco and shareholder-approved equity issuance, is likely to fuel expansion in the tire recycling ecosystem, thus boosting future revenue.
  
• Approval and integration of GRP’s repurpose polyolefins business with major brands are projected to improve order off-take and margins, leveraging sustainability trends to drive revenue growth.
  
• Developments in the carbon black industry and GRP's entry into recovered carbon black could create new revenue streams, supporting earnings growth by tapping into the growing emphasis on circularity and sustainability.

GRP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GRP's revenue will grow by 23.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 8.0% in 3 years time.
• Analysts expect earnings to reach ₹801.1 million (and earnings per share of ₹151.19) by about April 2028, up from ₹229.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.9x on those 2028 earnings, down from 69.1x today. This future PE is greater than the current PE for the IN Auto Components industry at 27.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.84%, as per the Simply Wall St company report.

GRP Future Earnings Per Share Growth

Risks

• The absence of formal approvals for higher-grade Reclaim Rubber and the reliance on pilot production could result in delays in scaling up production, potentially affecting revenue growth.
  
• Elevated raw material costs and inability to pass these costs on to customers due to fixed pricing contracts have negatively impacted gross margins, which could continue to pose risks to profitability.
  
• Heavy reliance on EPR credit income for margin improvements may not be sustainable due to unpredictable buying patterns from tire companies, potentially affecting EBITDA and net income consistency.
  
• Utilization of the new TPO plant and the stabilization period for commercial production could face delays, leading to potential shortfalls in expected revenue and margin increase from new ventures.
  
• High dependency on imported raw materials for synthetic rubber reclaims due to local shortages could increase operational costs, thereby compressing margins and affecting net earnings.
  

Valuation

• The analysts have a consensus price target of ₹4874.0 for GRP based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹10.0 billion, earnings will come to ₹801.1 million, and it would be trading on a PE ratio of 44.9x, assuming you use a discount rate of 13.8%.
• Given the current share price of ₹2970.05, the analyst price target of ₹4874.0 is 39.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.