Gravita India: Buy

The fall in global metal prices has cooled investor interest in the metal sector. And with revival not expected anytime soon, metal stock prices have been hammered down.

The BSE Metal index is currently down nearly 30 per cent from its June 2014 peak. But this sell-off throws up opportune buys for investors with a long-term horizon. One such pick is the stock of lead manufacturer Gravita India.

The company is among the largest lead recyclers in the country. Large installed capacity, presence in many geographies, and growing share of export revenue should hold Gravita in good stead.

The expected improvement in lead demand from the automobile and solar sectors is also a positive.

The stock is attractively priced, at around 12 times the trailing 12 months earnings. This is much cheaper than its average historical earnings multiple of over 40 times in the last nearly five years.

But given its small market capitalisation of around ₹250 crore, the stock may be suitable only for investors with a high- risk appetite.

Gravita’s primary business of lead manufacturing through recycling is likely to see continued growth momentum.

The company’s revenue and earnings grew at an average annual rate of 35 per cent and 32 per cent respectively in the last five years. It is expanding its installed capacity of 78,800 tonnes per annum as of March 2014 to 91,000 tpa.

Gravita lowered its revenue growth target for 2014-15 to 10-15 per cent (from 25 per cent) due to low metal prices. Lead prices, which are hovering at five-year lows, are however expected to stabilise this year as demand improves. The International Lead and Zinc Study Group estimates that demand will increase by 4.4 per cent to 11.7 million tonnes, matching supply and supporting price levels. Gravita gets nearly half its revenue from exports; improving fundamentals in the US and growth in hybrid cars abroad should aid export sales.

Improvement in auto battery sales, both new and replacement, in India should also help. Also, the push in solar power installations and pick-up in demand for inverters and UPS systems should mean more demand for lead in batteries.

About 5 per cent of the company’s revenue comes from turnkey recycling projects and trade in metals and chemicals. It is also diversifying into other recycling segments such as aluminium with a new unit in Jaipur expected to start production in the next couple of months.

Gravita’s profitability, which was under pressure, is expected to get a boost in the next few years. The company’s net profit grew at an annual average of 14 per cent in the last three years, lower than its revenue growth of 25 per cent in the same period. While sales volumes grew, the pressure on lead prices since 2011 impacted margins.

In the nine months to December 2014, sales increased at a slower pace of 12 per cent year-on-year to ₹386 crore; profit growth was only 3 per cent in the same period at ₹13.3 crore. The company expects that local demand will help sales and margins in the last quarter of 2014-15.

Another factor dampening profit growth in the past few years was low plant capacity utilisation at below 50 per cent.

The company expanded its installed capacity at a fast pace but suffered due to inadequate availability of raw material (recycled batteries).

The scenario looks better now. One, stable lead prices hereon should aid margins. Besides, new sources of inputs — both local and from 15 countries globally — have been identified.

Imported lead scrap used as raw material is price-competitive and the reduction in import duty from 10 per cent to 5 per cent will help.

Also, the company’s interest expenses may reduce after its credit rating was upgraded in January this year.

Gravita has debt of ₹90 crore on which it pays interest of ₹10 crore annually. The management estimates that improved rating will lower its interest cost by 6 per cent.

Overall debt is expected to stabilise as planned expansions of ₹65 crore over the next two-three years would be funded primarily through internal resources. The company’s debt-to-equity ratio as of March 2014 was a comfortable 0.8 times.