Gravita India: Q2-25 Earnings Call Highlights
Q2-25, driven by volume growth, increased domestic scrap availability, & successful hedging. Focus on capex, diversification, & increased value-added products. Will benefit from regulatory changes
gravitaindia.com | NSE: GRAVITA
1. Key Takeaways
1.1 TLDR
Gravita performance in Q2 and H1 FY25, driven by volume growth, increased domestic scrap availability, and successful hedging strategies.
The company is well-positioned to capitalize on future opportunities with its strategic focus on capacity expansion, diversification, and increasing value-added products.
The company is well-positioned to benefit from regulatory changes like the RCM and EPR, which are expected to drive further growth in the organised recycling sector.
1.2 Operational Highlights:
Financial Performance:
Consolidated Revenue: H1 FY25: Increased by 19% to ₹1,835 crores.
Q2 FY25: Increased by 11% YoY to ₹927 crores. 47% of revenue from value-added products.
Consolidated Adjusted EBITDA: H1 FY25: Increased by 30% YoY to ₹192.72 crores, margin of 10.5%. Q2 FY25: Increased by 27% YoY and 11% QoQ to ₹101 crores, margin of 11%
EBITDA per ton: Increased significantly for lead and aluminium by 22% and 57% respectively, driven by arbitrage opportunities between international and domestic markets.
Hedging: Approximately 10-15% of volume is hedged, leading to significant gains in Q2 due to market volatility.
Management considers hedging gains as operational income despite Indian accounting standards classifying it as other income.
Consolidated PAT: H1 FY25: Increased by 27% to ₹139.33 crores, margin of 7.6%
ROCE: Strong at 25% for H1 FY25.
Cash Flow from Operations: Increased to ₹73 crores.
Volume Growth:
Overall volume growth of 8% YoY in Q2 FY25
Lead and Aluminium volume up 9% and 3% YoY respectively
Capacity Expansion:
On track to reach over 5 lakh MTPA capacity by FY27
₹600 crore investment planned, including new verticals like lithium, paper, rubber, and steel recycling
Strategic Acquisitions & Expansion:
MoU signed to acquire a rubber recycling plant in Romania (first European facility)
Pilot project for lithium-ion battery recycling and the first Indian rubber recycling plant in Mundra progressing as planned
Focus on Value-Added Products: 47% of revenue from value-added products in Q2 FY25, aiming for 50% by FY28
ESG Roadmap: Committed to integrating ESG principles into operations and decision-making
Fund Raising: Board approved raising up to ₹1,000 crores for capex, M&A, debt reduction, and general corporate purposes
Reverse Charge Mechanism (RCM): Anticipating RCM implementation in battery scrap, expecting a shift from the unorganised to the organised sector
EPR Regulations: Noted a significant change in OEM behaviour towards recycling due to EPR regulations
1.3 Key Themes:
Domestic Scrap Availability:
Increased by 140% YoY in Q2 FY25 due to stricter government regulations under Battery Waste Management Rules (BWMR) and Extended Producer Responsibility (EPR).
Strategic Initiatives:
Acquisition in Romania: Gravita Netherlands signed an MoU to acquire a rubber recycling plant with 17,000 MTPA capacity, marking their first European facility.
Fund Raising: Board approved raising up to ₹1,000 crores for capacity expansion, M&A, debt reduction, and general corporate purposes.
Lithium-ion Battery Recycling and Rubber Recycling Plant: Pilot projects progressing as planned, expected to be operational in H1 FY26.
Vision 2028: Aims to achieve over 25% volume growth, 35% profitability growth, and ROCE exceeding 25%. Focus on diversifying into new sectors, increasing value-added product share, and improving sustainability.
1.4 Key Quotes:
On RCM: "The reverse charge mechanism will also fast track this conversion from unorganized to organized because currently in the unorganized sector, a lot of GST evasion is taking place."
On hedging gains: "In case of loss [hedging] is already part of operational income because it is considered as other expenses, but in case of income, it is considered as other income."
On future volume growth: "As we have given the guidance of around 25% CAGR growth in the next four years, it will be in the same vicinity of 25% this year also."
On the Romania acquisition: "It's a very small acquisition currently... but more strategic than anything else where we want to set up our own businesses in Europe."
1.5 Analyst Concerns:
Volume growth guidance for FY25, particularly for aluminium and plastics.
Impact of aluminium listing on MCX and expected capacity utilization.
Quantity of lead hedged and the sustainability of per kg margins.
Rationale and utilization of the ₹1,000 crores fundraise.
Impact of the RCM on the lead refining business.
Impact of increased domestic scrap availability on profitability.
Status of the paper recycling plant in Central America.
Revenue and margin expectations from the Romanian rubber recycling plant.
Reason for the modest sequential volume growth despite material in transit.
Gravita's bargaining power with suppliers and customers.
Focus areas for M&A opportunities.
Gravita India Limited Q2 FY25 Earnings Call FAQ
1. What is the expected volume growth for FY25, and what are the key drivers for this growth?
Gravita India expects a volume growth of around 25% for FY25, in line with their projected CAGR over the next four years. This growth is expected to be driven by:
Lead: Projected growth of 17-20%
Plastic and Aluminium: Projected growth of 35-40%
The company attributes this projected growth to capacity expansion, diversification into new sectors, and a focus on value-added products.
2. What is the status of the aluminium listing on MCX, and what is the expected capacity utilization for aluminium by the end of the year?
The listing of aluminium contracts on MCX is in process, with all approvals received from the Finance Ministry. Gravita India expects the listing to be completed in Q4 FY25.
Capacity utilization for aluminium is currently at 45% and is expected to surpass 50% in H2 FY25, driven by the upcoming hedging solutions on MCX.
3. How much of Gravita's volume is hedged, and how does hedging impact profitability?
Gravita hedges approximately 10-15% of their total volume, which equates to around 10,000-12,000 tons. The turnover from hedging activities can be much higher, as hedging is done on a daily basis. Hedging gains or losses pertain to the full volume of the relevant commodity, not just the hedged portion.
Hedging provides profitability stability, particularly during periods of price volatility. When lead prices decrease, hedging gains typically increase as vendors are less willing to sell, requiring Gravita to hedge on the purchasing side. Conversely, when prices increase, hedging occurs on the sales side.
4. What is the purpose of the proposed INR 1,000 crore fundraise, and is it definite?
The fundraise is intended to provide financial flexibility for potential M&A opportunities, expedited capital expenditure related to policy changes like the Reverse Charge Mechanism (RCM), debt reduction, and other corporate purposes.
The fundraise is currently an enabling provision and is not definite. The amount and timing will depend on the emergence of concrete acquisition opportunities and other strategic needs.
5. How will the Reverse Charge Mechanism (RCM) impact Gravita India's business?
The RCM is expected to accelerate the shift from the unorganized to the organized recycling sector. By making buyers responsible for GST payments on purchases from unregistered sellers, it will reduce tax evasion in the unorganized sector and incentivize compliance. This shift will benefit Gravita India by:
Increasing formal scrap availability: Formalized players will increase supply, providing Gravita with better access to raw materials.
Improving competitiveness: The increased compliance costs for unorganized players will make Gravita more competitive.
Driving faster capacity expansion: Gravita might need to expand capacity more rapidly to cater to the increased demand from the formalized sector.
6. What is the status of the paper recycling plant setup in Central America?
The paper recycling plant, along with the steel recycling plant, is expected to be operational in FY27.
7. What are the expected revenue run rate and margins for the newly acquired rubber recycling plant in Romania?
The plant has a capacity of approximately 17,000 metric tons per annum, and Gravita expects to achieve 60-70% capacity utilization from the start. While this acquisition is relatively small, it represents a strategic foothold in Europe and the company plans to increase capacity and explore other recycling opportunities in the region.
Instead of focusing on per-kilogram margins, which vary significantly by geography, Gravita anticipates achieving a Return on Capital Employed (ROCE) upwards of 35% for rubber recycling in overseas locations and around 25% in India.
8. What is Gravita India's M&A focus in terms of verticals and geographies?
Gravita is open to opportunities in all recycling verticals and geographies. However, their primary focus is on expanding their existing verticals, particularly plastic and rubber recycling, where they currently have a smaller presence.
Lead recycling remains a potential area for acquisitions, especially in India, given the anticipated impact of the RCM. The company is also open to exploring opportunities in new verticals.
Source: Link to Earning Call Recording
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