Expansion Into Lithium-Ion Battery And Rubber Recycling Positions For Future Success

Key Takeaways

• Capacity expansion and M&A in global locations are poised to drive volume and revenue growth positively.
  
• Diversifying into new recycling verticals and utilizing raised capital strengthens financial health and enhances margins.
  
• Execution risks in expansion projects and reliance on domestic scrap sourcing may affect Gravita India's profitability amidst global economic slowdown and rising geopolitical challenges.

Catalysts

Manufactures and recycles aluminum, plastic, lead, and lead products in India, the United Arab Emirates, South Korea, and internationally.

• Expansion of capacity, particularly in the Mundra plant and new facilities in Ghana and overseas locations like Romania, alongside exploring M&A opportunities, is expected to drive volume growth, impacting revenue positively.
  
• The development of new recycling verticals, including lithium-ion batteries and rubber, positions Gravita to diversify its portfolio, potentially enhancing margins because these are higher-margin sectors compared to traditional lead recycling.
  
• Strategic utilization of ₹1,000 crores raised through QIP for debt repayment, capacity expansion, and working capital is expected to strengthen financial stability, reduce interest costs, and boost profitability.
  
• Increasing domestic scrap availability due to regulatory changes like BWMR and EPR, combined with the shift from unorganized to organized sectors, should lead to cost savings and margin stabilization through cheaper local sourcing.
  
• Increased stake in global operations, like the 100% acquisition of Navam Lanka Limited, supports international revenue growth and exposure to more profitable markets, enhancing overall earnings.

Gravita India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gravita India's revenue will grow by 26.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 9.0% in 3 years time.
• Analysts expect earnings to reach ₹6.7 billion (and earnings per share of ₹91.21) by about February 2028, up from ₹2.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 43.7x on those 2028 earnings, up from 43.2x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 20.4x.
• Analysts expect the number of shares outstanding to grow by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.59%, as per the Simply Wall St company report.

Gravita India Future Earnings Per Share Growth

Risks

• The global economic slowdown and its impact on the metal sector could adversely affect Gravita India's revenue and volume, despite a current increase in Q3 FY '25. Economic conditions may limit demand for metals, impacting overall earnings.
  
• The company's reliance on significant capacity expansion and diversification projects, such as in Mundra, Ghana, and the pilot project for lithium-ion recycling, carries execution risks which may delay revenue generation and impact net margins if not achieved as planned.
  
• The increase in domestic scrap sourcing and subsequent slightly lower margins highlight a potential risk in maintaining EBITDA per tonne margins if domestic availability cannot match the profitability of imported scrap. This could affect earnings stability.
  
• Macroeconomic factors, such as currency fluctuations and geopolitical instability in regions where Gravita operates, including potential disruptions in Africa or expansions in areas like Oman, could negatively impact revenue and earnings through increased operational costs or reduced market access.
  
• Competitive pressures and regulatory changes, such as new entrants in the recycling industry, or changes in government policies related to environmental practices, including the Reverse Charge Mechanism and EPR regulations, could alter scrap availability dynamics, impacting profitability and consistent revenue flow.

Valuation

• The analysts have a consensus price target of ₹2631.714 for Gravita India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3431.0, and the most bearish reporting a price target of just ₹641.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹74.2 billion, earnings will come to ₹6.7 billion, and it would be trading on a PE ratio of 43.7x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹1699.85, the analyst price target of ₹2631.71 is 35.4% 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.