This large plastic recycler has a new PET project. Investors love it.

Ganesha Ecosphere Ltd, the market leader in India’s PET plastic recycling industry, has outperformed the Nifty Smallcap 250 index by almost 2.5 times (54% vs 22%) over the past six months.

With a market capitalisation of ₹4,063.25 crore, the Uttar Pradesh-based company is not part of the benchmark index, which captures the performance of small cap companies. Yet it commands a staggeringly high valuation compared to the broader index. The stock’s trailing 12-month price-to-earnings (P/E) ratio is 70.24, while the index’s is 33.29, according to Bloomberg data.

Investors are betting on a strategic shift in the company’s core business, from converting PET waste into fibres and yarns for the textile industry to repurposing PET waste into reusable plastic bottles and packaging materials for the fast-moving consumer goods industry, analysts told Mint.

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Last week, Ganesha Ecosphere reported around 5% on-year growth in its standalone revenue to ₹244 crore in Q1FY25. Consolidated revenue came in around ₹337 crore, representing around 32% growth year-on-year. The company’s standalone financial results reflect the condition of its legacy business, while the consolidated results reflect activities from its new business business.

‘Huge scope for plastic recyclers’

An environmental, social, and governance (ESG) analyst at a large mutual fund house, who did not wish to be named, told Mint, “There is huge scope for companies like Ganesha that know the industry very well and will be able to cater to a lot of companies that require bottles. There is also a huge market for r-PET (recycled PET products)."

“Reliance is also moving into this segment because it can leverage its huge petrochemical chain," the analyst added.

PET (polyethylene terephthalate) is one of the most commonly used and recycled forms of plastic. It is used to make beverage and water bottles, detergent and cleaning containers, and food containers. It is recycled into new bottles and polyester fibres and yarns for clothing, home furnishings, and industrial products.

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Virgin PET is made from petroleum-derived chemicals and contributes to all the problems associated with extracting fossil fuels. It is not biodegradable either, so governments around the world have taken steps to curb its use. The concept of extended producer responsibility (EPR) has gained traction worldwide, and the Indian government started implementing this in FY22 under the Plastic Waste Management Rules, 2016. EPR is an environmental policy that makes producers responsible for the environmental impact of their products and packaging throughout their lifecycle.

Regulatory boost

Ganesha Ecosphere has been manufacturing polyester staple fibre, dyed yarn and spun yarn by recycling PET waste for more than three decades. It recently began manufacturing r-PET chips and r-PET filament yarn.

The analyst quoted above said, “The most recent amendment (of EPR norms) mandated a threshold of adding recyclable substances into packaging materials, which is why you see a sudden interest in recycling (from companies)."

Under EPR norms, the ministry of environment, forest and climate change has mandated that producers, importers, and brand owners include at least 30% of recycled PET along with virgin PET in new packaging materials they produce or use from 1 April 2025. This requirement will rise to 60% by FY29. The new rule bodes well for recyclers such as Ganesha Ecosphere, which will see an uptick in demand from large FMCG companies, analysts told Mint.

Strategic pivot

The textile industry is cyclical, and has been in trouble in the past couple of years owing to a slowdown in demand in the US and EU. This affected textile exports from India and caused Ganesha Ecosphere’s revenue and net profit to drop substantially, particularly in Q1FY24. The import of cheap Chinese fibres and yarns has also hurt the company.

The global textile industry improved in Q1FY25, leading to 554% on-year growth in the company’s consolidated net profit at around ₹23 crore. But this has not dispelled broader concerns about the textile industry.

Also read: Why fashion's recycling is not saving the environment

Gopal Agarwal, chief financial officer of Ganesha Ecosphere, said during the earnings call, “(The) journey seems a little bit uneven for our fibre and yarn business, with the addition of some new capacities in the industry intensifying the competition further and certain political crisis in Bangladesh affecting our exports."

Clearly, the company’s legacy business has been unable to generate good returns on capital lately. Meanwhile, the new EPR regulations have incentivised it to get into new product lines, particularly for the FMCG industry, which is relatively less cyclical and is likely to generate substantial demand in the future. This is why the company is pivoting to FMCG customers, analysts told Mint.

Greener pastures

Beverage consumption in India is growing at a compound annual growth rate of 18-20%, leading to a dramatic increase in the number of PET bottles, Yash Sharma, director of Ganesha Ecosphere said during the earnings call.

The company’s largest customers are Coca-Cola and Varun Beverages, the largest bottler for Pepsi. Around 48-50% of the r-PET chips the company produces are turned into bottles for these two firms, analysts told Mint.

As the largest player in India’s plastic waste industry, it has the capacity to produce twice as many r-PET products as its nearest competitor, according to a Dalal & Broacha Stock Broking research report. It can currently produce up to 42,000 tonnes of recycled PET products, including bottles, textile-grade plastic chips and filament yarns, at its newly commissioned Warangal plant.

Also read: Centre plans to start e-waste audit, impose penalty as environment compensation

The company expects to earn around ₹1,000 crore from its legacy business and around ₹500-600 crore from the new business in FY25, according to its recent earning calls transcript. However, it is yet to announce any expansion plans for the new business.

“The business is shifting from textiles to FMCG, so the upcoming capex plans will be for r-PET bottles. In the next three to four financial years, the PET bottle segment will bring in huge revenues," Agarwal told Mint.

‘Scarcity premium’

Two analysts have a “buy" recommendation for Ganesha Ecosphere’s stock with an average target price of ₹1,862.50 over the next year, according to Bloomberg data.

One of them told Mint, "If you’re looking from a four to five year angle, this (stock) could be a multibagger because of its revenue visibility and EPR regulations kicking in. There is no other player of this size that can execute such complex operations, so you will get a scarcity premium."

The stock was trading at ₹1,734.55 around 1.30 pm on Friday, up 8.2% on the day. It’s up more than 70% over the past year.

Also read: Electronic waste increasing at concerning rate, says report