Wishing You a Joyous Dussehra! Celebrate the victory of good decisions in your financial journey!
Wishing You a Joyous Dussehra! Celebrate the victory of good decisions in your financial journey!
SEBI Registered: Research Analyst | Investment Adviser | Call: +91 97730 15000 | Email: research@stockaxis.com
December 21, 2024
|Nobody wants to touch scrap, right?
“It holds negligible value”, one would say.
“It’s true”, says the layman.
“But wait - let’s ask the founders of material recycling businesses in India”, says the intellectual. “I’m sure they would beg to differ.”
This conversation throws light on the opportunistic mindset of individuals who dreamt of making a business out of scrap! Yes, you heard that right: Scrap. While a layman is complacent and brushes off scrap as worth nothing, the intellectual thinks deeper and tries to figure out what he/she can make out of it.
And this is where businesses like Gravita India come in.
In this article, we take a look at Gravita India’s business, and its inherent advantages. Then we compare it to a global company in a similar line of business and explore its potential, and what optionalities it possesses for future growth and expansion in the scrap recycling and salvaging market.
Gravita India Ltd is a leading recycling company and one of the largest lead producers in India. The company's business is organized across four specialized verticals: Lead Recycling (flagship), Aluminum Recycling, Plastic Recycling, and Turnkey Projects. The company is headquartered in Jaipur, India, and has multiple scrap collection & recycling facilities within India and at overseas locations.
Material recycling is the process of turning materials that would otherwise be thrown away into new products:
This is a highly fragmented and shunned sector in India since setting up a recycling business is capital intensive, and it's often given less preference than other businesses.
Gravita is in the business of recycling scrap/industrial waste in the form of lead, aluminum, and plastic. It also specializes in producing value-added products from this process, which have higher value.
This is a well-established business, set across a wide geographical area globally. Gravita commands an extensive network including 31 dedicated yards and 1,700 touchpoints, enabling it to maintain a robust scrap collection capacity exceeding 250,000 MT. It possesses a recycling capacity of 3,02,859 MT, as of the end of FY24.
To explain simply, Gravita’s business has three foundational pillars to its business: Its Supplier Network, Itself, and its Customer Network, as illustrated in the chart below:
The images above show the global network of Gravita India’s operations. With over 1700 procurement touchpoints, 31 scrapyards, and over 325+ customers globally, Gravita boasts of an extensive network in the materials recycling space.
Gravita derives 88% of its revenues from Lead recycling and related value-added products. (FY24), 8% from aluminum recycling, 2% from plastic recycling, and the balance from turnkey projects.
An image illustrating the finished output of the lead recycling process.
Looking forward, the management has stated their intention to reduce the share of lead recycling to ~70% from the current 88% by expanding into other categories of recycling and salvaging.
Battery Recycling (including Lithium Ion), Steel recycling, Tyre Recycling, and Aluminum recycling are the emerging areas the company is focusing on to drive its future growth and profitability.
The company is also eyeing certain acquisition opportunities abroad, in line with its plan to achieve scale at the overall business level.
The table below shows us the summary of its 5-year financials:
Particulars | 2020 | 2021 | 2022 | 2023 | 2024 | CAGR |
---|---|---|---|---|---|---|
Revenue from Ops | 1352 | 1412 | 2223 | 2808 | 3164 | 24% |
Gross Profit | 257 | 277 | 472 | 519 | 600 | |
Gross Profit Margin% | 19.0% | 19.6% | 21.2% | 18.5% | 18.9% | |
PAT | 37 | 57 | 148 | 204 | 242 | 60% |
PAT Margin% | 2.7% | 4.0% | 6.7% | 7.3% | 7.7% | |
Reserves and Surplus | 211 | 255 | 373 | 575 | 824 | 40% |
Total Debt | 273 | 256 | 387 | 344 | 545 | 19% |
ROCE (%) | 16.54 | 19.92 | 31.19 | 31.76 | 28.16 | |
RONW (%) | 17.27 | 23.00 | 45.27 | 41.83 | 33.97 | |
Adjusted EPS | 4.81 | 7.60 | 20.19 | 29.12 | 34.64 | 64% |
Consolidated Financials. Source: Company Filings All figures in Rs. Cr (except EPS) and margins.
The Scrapyard is the single most important asset of a recycling business. In a scrapyard, discarded materials are collected, sorted, dismantled, recycled, and resold for reuse or proper disposal.
Gravita owns 31 such yards, with 26 in Africa and 5 in Asia. These are located across India, Mozambique, Tanzania, Senegal, Togo, Ghana, Sri Lanka and the Netherlands.
Scrapyards are strategic assets for a company since:
And here is why we believe so:
There is a company on the other side of the world, Copart Inc., which operates in a business similar to Gravita India.
Copart Inc. is reportedly the largest Online Used Car Auction company in the world.
It acts as a platform for online auctions and vehicle remarketing services, thus connecting buyers and sellers. This not only helps in price discovery for the salvaged cars and car parts, but also enables the free-market forces to favourably influence this market.
We’re using the word “similar” and not “same”. We got on to the drawing board and tried to see what makes these two businesses “similar”. And the results of our analysis are tabulated below:
Particulars | Gravita | Copart |
---|---|---|
Business | Lead, Aluminum, Plastic. Upcoming - Lithium, Steel Recycling - processing and selling | Online Vehicle Auctions, recycled parts selling |
Type of Activity | Production, Process, and selling | Resale, refurbish and resale |
Number of Scrapyards Owned | 33 | 243+ |
Scrapyard Regions | Africa, India, Sri Lanka, US (Upcoming), Europe -Romania, Oman (Upcoming) | 11 Countries - Dominant Player in the US |
No. of Countries Selling to | 50+ | 185-190 |
Revenue ($Mn) (TTM) | 418 | 4240 |
Market Cap ($Bn) | 1.8 | 58.9 |
Market Cap/Sales | 4.46 | 13.67 |
TTM PE | 57.05 | 42.7 |
EV/Revenue | 4.53 | 12.67 |
EV/EBITDA | 40.89 | 30.98 |
Your guess it right. It’s the Scrapyards that these two companies own.
Although the kind of materials both companies collect, process, recycle and produce are slightly different, the core fundamental concept of material recycling remains. And this is where the beauty lies.
Copart started off a business that purchased used cars, took out the useful parts out of them, made them functional, and resold them in the market for a premium. The company also resold those used cars by making them functional and reusable.
The core asset needed for setting up this business were the scrapyards or the salvage yards, which the company acquired over the years, as it consolidated its position in North America’s salvaged car market. Today, Copart owns anywhere between over 243 scrapyards spread across the US, Canada, the UK, Germany, Ireland, Brazil, Spain, UAE, Bahrain, Oman, and Finland. These assets are worth billions of dollars today.
Copart transitioned from being a “traditional salvaged car trading company” to an “online salvaged car trader-cum-market maker” over the years.
It used its vast supplier and customer network and brought them on a common platform to do business, on which it would earn a commission.
Gravita is already venturing into tyre recycling and battery scrapping, which are specifically linked to the automotive market. In addition, its Aluminum recycling business is also another vertical that taps into the automotive used car/scrap/salvage market and the aftermarket/car parts market.
We’d like to point out a few points that we think can make Gravita even better than what it is today:
According to a report by Fortune India, as of September 2024, there are 63 operational scrapping centres in India, with 60 under construction and 40 in the pipeline. With the government incentivizing vehicle scrapping in India, and the advent of BWMR and EPR regulations, conditions are becoming conducive for recyclers like Gravita. As per the government, India requires 1000 scrapping centres and 100 fitness test centres for vehicles. (Source: Government Public Databases). Several Automakers in India have started setting up such centres, but the demand is so huge, that it may require an organized player of Copart’s scale in India.
The question is: Can Gravita capitalize on this opportunity?
India’s scrapping-recycling market is very fragmented, and this serves as a window of opportunity for Gravita to consolidate its position further in its existing areas as well as newer areas. Acquiring scrapyards both in India and abroad seems to be the way ahead from here on for Gravita.
Taking heed to the prevailing trends, the company has already entered battery recycling, and aluminium and steel recycling. However, there is a lot of room to grow and consolidate.
When we compare Gravita to Copart, we are comparing two businesses that are fundamentally the same in nature, but one is more mature, seasoned, and evolved, with multiple streams of revenues, while the other is a fast-growing emerging business slowly discovering its true potential.
Copart evolution into what it is today is marked by its ability to add new sources of revenue to its business from the relevant adjacencies. From a single used car to a single scrapyard, to becoming USA’s largest car salvaging company, Copart has come a long way.
How well can Gravita emulate Copart’s business model? - only time will tell. Whether it will become a player of Copart’s scale, remains to be seen.