We initiate coverage on Gravita India with a ‘buy’ rating and a price objective of Rs 129 per share. At the current market price, the stock quotes 9.6x price-to-earnings (P/E) and 2.6x price-to-book (P/B), discounting our FY17e figures. Given the absence of any significant capex and sharp improvement in utilisation levels, the company is ripe for re-rating. Hence, we have a positive view on the stock.
Gravita is one of the largest lead re-cyclers in India, with 91,500 tonne capacity across four locations in India and another four overseas. Over the years, the company has increased its capacity organically and through acquisitions, to tap rising demand for recycled lead. Most of its plants offer logistical advantages or are located in tax free zones, enabling the company to maintain a steady level of operating profitability.
We believe ramping-up utilisation level will drive revenue growth. Continuous capacity expansion has resulted in Gravita operating below 50% utilisation. Additionally, it was not able to tie down timely supply of used lead acid batteries (LAB) as a cost-effective alternative to crude lead. However, with the company close to finalising international sources for spent LAB, we expect the steady supply of inputs to raise output from 35,000 tonnes in FY14 to 50,000 tonnes in FY15. Thus, the company could achieve revenue and ebitda growth in excess of 50% in FY15.
Domestic and global LAB manufacturers, supplying to the auto sector, form Gravita?s largest clientele for refined lead. With the domestic market expected to grow 15-20% and international markets also showing signs of recovery, Gravita expects its incremental output of 15,000 tonnes in FY15 to be easily absorbed.
