When a Chief Financial Officer of a company, which is making 30 percent return on equity, says that the company will not be net cash positive for some time as they will keep investing cash back in the business because of the huge demand, this is actually an opportunity rather than a concern for investors.

Why? The company will be compounding its equity at a very high rate of return rather than distributing the cash back to its shareholders in the form of dividend.

Recycling profits

The company in question is Gravita India, which is into the waste recycling business. In India there are hardly any national serious players in the waste recycling business and Gravita is the largest player with annual sales turnover of Rs 655 crore. It collects lead-based scraps, its biggest business contributor accounting for 80 percent of its sales, like lead batteries, UPS, inverters etc. from India and international markets. It collects these lead-based products, recycles them, sells them to companies like Exide, Amara Raja and many others in domestic and international markets who use lead as raw material. For instance, a typical car battery would be about 20 kg and worth about Rs 1400 in the scrap market.

While other recycling segments like aluminium scrap (10 percent of sales) plastics (6 percent of sales) and a few other segments like paper are small but growing and holds a lot more room for growth. It is also exploring opportunities in other categories like e-waste including lithium and other categories to leverage is know-how and technological advantages.

Most of its machines that are used for converting these materials are manufactured in-house. This not only gives the technological advantage but produce capital efficiency and cost advantage, which is essential for its leadership and growth. This is precisely the reason that despite B2B business why it makes 8 percent operating margins and 5 percent net profit margins.

Moving up the value chain

The company is beginning to tap its potential. “We in India do not have problems of waste; we have plenty, but what is lacking are solutions that we can develop to tap this opportunity sustainably,” said Sunil Kansal, Chief Financial Officer, Gravita India.

The company has great strength in processing, recycling and giving back to the society. If it is able to break through the collection it will open up a large tapped market and several other products that are small in its portfolio.

Nevertheless the company is experimenting and working on disruptive ways to collect waste to remove the inefficiency and catch a larger share of the market, which is largely an unorganised one.

For instance, they are looking to develop equipment packages that will enable housing societies to manage waste and get paid for the same. They have already made good progress involving about 55 (35 clients in FY16) big corporates to manage their waste, which is again efficient, remunerative and fulfil social obligations.

Moreover, the company has strong presence in international markets as well. Of the 11 plants that the company is operating with the total capacity of 1.74 lakh tonnes, 6 are in international markets like Africa, the US and Sri Lanka. It is expanding its capacity to 2.72 lakh tonnes by end of FY19. This quantum jump in capacity will add to growth apart from the benefits of higher utilisation at the existing plants, growth from other segments like plastics, paper and natural demand push in the lead industry as a result of demand in the user industries.

Valuations

In the first half of the current financial year the company made a cash profit of Rs 29 crore, which on an annualised basis works out to about Rs 60 crore. Next year in FY19 with the new capacities going on stream and efficiencies the company should be making a cash profit of close to Rs 100-110 crore, which is a cash profit yield of close to 9.5-10.5 percent at the current market capitalisation of Rs 1055 crore or Rs 153 per share. This is quite good for a company which is in the high growth market, having a leadership and earning superior return ratios.

Source: LINK

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