Despite 170% gain in just 4 months, ICICI Sec sees further steam in Gravita India, lists 3 key drivers for future growth

Shares of Gravita India, one of India's largest lead producers, have delivered remarkable returns to their shareholders in recent period. The stock, which was valued at ₹977 per share four months ago, has surged by a massive 170 per cent, reaching ₹2,585. This surge has driven the stock to soar by 1220 per cent over the past three years, establishing it as one of the top wealth creators on Dalal Street.

Despite this significant rally, domestic brokerage ICICI Securities sees further upside potential on the stock due to several factors. The brokerage cites regulatory tailwinds boosting scrap availability in the domestic market, planned expansion in Europe, and increased use of recycled materials across various products and regions as key drivers for future growth.

It believes that the positive impact of these developments will begin to reflect in the company's earnings in the medium term. As a result, the brokerage has updated its valuation method from P/E to DCF to better capture the company's growth potential.

Therefore, the target price was lifted to ₹3,265 per share, up from its previous target of ₹1,750, indicating a 28 per cent upside from the last closing price of ₹2,558 per share.

Established in 1992 in Jaipur, Gravita India specialises in lead, aluminium, plastics, and rubber recycling, catering to both domestic and global markets. With a widespread international presence, the company boasts a robust clientele of over 375 customers across Asia, the Middle East, Europe, and the Americas, spanning 38 countries.

Simultaneously, its operations within India serve more than 230 customers across 22 states.

Regulatory tailwinds to aid procurement

The Central Pollution Control Board (CPCB) has issued Environmental Compensation (EC) guidelines for lead-acid and lithium-ion batteries under the Battery Waste Management Rules 2022. Recyclers can now trade metal-wise Extended Producer Responsibility (EPR) credits to boost collection networks and ease the burden on recyclers.

Additionally, the introduction of a reverse charge mechanism (RCM) and 2 per cent TDS on metal scrap will create a level-playing field for organized recyclers like Gravita India, aiding procurement from the domestic market and shifting focus from unorganised to organised sectors, the brokerage underscored. 

Acquisition in Romania—a first in Europe 

Gravita's subsidiary, Gravita Netherlands BV (GNBV), has signed an MoU to acquire the fixed assets of Access Auto Trading SRL (AAT), a 17ktpa waste tyre recycling plant in Romania, marking the company's first venture in Europe. Gravita will invest ₹320 million for an 80 per cent economic interest, subject to due diligence. The acquisition is expected to expand Gravita's presence in the recycled rubber market and diversify its operations.

According to the brokerage, this move will contribute to Gravita's goal of increasing total recycling capacity to over 700 ktpa by FY28.

Recycling is gathering momentum

ICICI Securities highlights that India is becoming a key destination for companies seeking recycled lead, with many manufacturers now required to include recycled lead in their products. Indian players are adding capacities to meet this growing demand, as lead is a homogenous material that can be sourced from various locations.

A study on plastic waste reveals that over half of branded pollution can be traced to just 56 companies, with Coca-Cola, PepsiCo, Nestlé, and Danone responsible for 20 per cent. Coca-Cola has set a goal to make 100 per cent of its packaging recyclable by 2025 and use at least 50 per cent recycled material by 2030, which could positively impact companies like Gravita India, said the brokerage. 

In India, new Environmental Compensation (EC) guidelines for waste tyre management have been approved by the Ministry of Environment, Forest, and Climate Change (MoEFCC). Non-compliant manufacturers will face penalties of up to ₹8.40/kg. The brokerage believes these steps will benefit Gravita India, thanks to its strong sourcing network and multi-plant locations, which ensure better margins compared to its competitors.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.