Investments In Lithium-Ion And Rubber Recycling Will Diversify And Increase Future Output

Key Takeaways

• Expansion in recycling and acquisitions aims to boost production capacity, supporting future revenue growth and improved earnings through integration.
  
• Strategic focus on ESG goals and supply chain optimization may enhance operational efficiency and net margins, especially through cost reduction and better resource management.
  
• Gravita India's aggressive expansion into new verticals and geopolitical exposures present risks to revenue stability and profit margins amidst global economic challenges.

Catalysts

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

• Gravita India's expansion of its Ghana facility to produce recycled aluminum and its future plans to double the capacity signal increased production capabilities, likely impacting future revenue positively.
  
• The company has plans for significant capacity expansion across their operations, targeting over 500,000 metric tons by FY '27, which will likely contribute to revenue growth.
  
• Ongoing investment and development into lithium-ion and rubber recycling plants are expected to contribute to future diversification and revenue, potentially improving net margins given these are higher value-added products.
  
• The strategic move to increase stakes in subsidiaries, like the full acquisition of Navam Lanka Limited, might streamline operations and contribute to higher earnings through better integration and consolidation gains.
  
• The focus on meeting ESG goals and obtaining more domestic scrap could optimize the supply chain, reduce costs, improve operational efficiency, and enhance net margins due to better resource management and lower raw material expenses.

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 March 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 43.6x on those 2028 earnings, down from 43.9x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 19.8x.
• 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 14.54%, as per the Simply Wall St company report.

Gravita India Future Earnings Per Share Growth

Risks

• The global economic slowdown, particularly in the metal sector, could impact Gravita India's revenue growth expectations if the demand for recycled materials declines.
  
• The company's exposure to geopolitical risks in regions like Mozambique and issues like the Red Sea shipping disruptions can pose a threat to its supply chain and revenue stability.
  
• The lack of a hedging mechanism for aluminum could expose Gravita to market volatility, potentially affecting profit margins.
  
• Dependence on regulatory policies, such as reverse charge mechanism on battery scrap, which if delayed or changed, could impact domestic scrap availability and operational efficiency, thus affecting net margins.
  
• The aggressive expansion strategy, including heavy investments in new verticals like lithium-ion and rubber recycling, carries execution risk, which may strain financials and impact earnings if not managed successfully.

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 43.6x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹1724.65, the analyst price target of ₹2631.71 is 34.5% 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.