Gravita India on solid ground with regulatory tailwinds giving it a boost

Gravita India Ltd, a metals and plastic recycling company, is in a sweet spot following two favourable developments that propelled its shares to a new 52-week high of ₹2,660 apiece on Monday.

The GST council recently introduced a reverse charge mechanism on the supply of metal scrap by an unregistered person to a registered person, provided the recipient pays tax even if the supplier is under the threshold.

While this is expected to lower instances of tax evasion, it would also aid the formalisation of the recycling market, where Gravita is a key player. The company specializes in recycling lead (contributing over 80% of revenue), aluminium, plastic, and rubber. The unorganised segment accounts for around 65% of the lead recycling market in India.

Additionally, the Central Pollution Control Board (CPCB) has notified environmental compensation (EC) for non-compliance of extended producer responsibility (EPR) targets as per the battery waste management rules, 2022. The CPCB has set the price of EPR credits at 30-100% of EC, or ₹5.4-18/kg for lead acid batteries.

“The EC for lead acid batteries is finalized at ₹18 per kg, much higher than our expectation of about ₹10 per kg,” Kotak Institutional Equities analysts said in a report on 16 September. “Such high penalty would enhance compliance of EPR targets by battery OEMs, which would translate into higher recycling.”

ICICI Securities Ltd said that the two developments taken together would likely “create a level-playing field for organized players in procuring domestic scrap as well as accelerate the shift from unorganized to organized, leading to better compliance and accountability”.

The brokerage firm pointed out that companies such as Gravita that have multi-location recycling plants and efficient procurement networks are likely to benefit more.

Increased formalization of the recycling market over time is expected to gradually boost Gravita’s volumes and earnings. For FY25, the company’s management is expecting volume growth to exceed 25%. In the June quarter (Q1FY25), volume growth was at a splendid 29%, driven by a 43% rise in lead volume.

Under its ‘Vision 2028’ plan, Gravita’s focus is on expanding into new recycling segments such as lithium-ion, steel, and paper. The company is looking to increase its value-added products and non-lead business to over 50% and 30%, respectively.

For now, investors seem to be capturing a good share of the optimism, what with the 136% jump in the stock price so far in 2024 as against the Nifty 500 index’s 23% rise. In this backdrop, meaningful near-term appreciation may be curtailed in the stock. Any potential gap in implementing existing policies is a risk for Gravita.