Business

Gravita India — Know the Business

Gravita is a spread-based recycler that earns a locked-in processing margin on scrap regardless of LME direction — making it less of a commodity play and more of a structured toll road on India's battery waste stream. The single most important variable over the next two years is whether ₹1,500 Cr of new capacity ramps to 85% utilisation by FY2028; at 34× P/E with ROCE at a cycle low, the market is paying for that ramp to succeed.

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1. How This Business Actually Works

The spread is the product — Gravita buys scrap at a structural discount to LME lead, locks in the processing margin through back-to-back MCX hedging before the furnace fires, and earns ₹18–23K per tonne regardless of where LME moves next.

A useful analogy: think of Gravita as a toll booth operator where LME is the road and the spread is the toll. The toll is fixed at the moment a battery pulls in. Revenue scales with traffic (volume); EBITDA scales faster once fixed costs are covered (utilisation leverage).

Revenue compounded at 24% CAGR over 10 years while profits grew faster, reflecting the operating leverage of a fixed-cost recycling business scaling into its capacity. FY2016 and FY2019 dips coincided with lower LME prices passing through to scrap input costs — revenue fell, but margins held because the hedging model protected the spread. This is the key observable proof that the model works.

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2. The Playing Field

The peer set reveals that the market is pricing Gravita — and even POCL — on the EPR regulatory tailwind narrative, not on current returns.

HBL Power OPM is net-margin proxy; Hindustan Zinc OPM is mining-segment estimate. Both shown for valuation context only — economics are structurally different from recycling.

Three observations the peer set forces: First, POCL trades at 36.8× P/E despite 3 percentage points less OPM and identical ROCE — meaning the market is not rewarding Gravita's operational quality with a premium; it's pricing the sector thesis. Second, NILE at 10.9× P/E is the value anomaly — a competent lead recycler that simply lacks the scale, geographic reach, and growth capital to benefit from EPR at the same rate. Third, HBL Power at 28.7× P/E with 27.3% ROCE shows what "better capital returns than Gravita" earns right now in adjacent industries — roughly a 17% discount to Gravita's multiple, suggesting investors are indeed paying an expansion premium for Gravita's growth runway.

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3. Is This Business Cyclical?

Yes — but the cycle that matters is not LME. It is the internal investment cycle, and Gravita is currently deep inside it.

The ROCE chart tells the investment cycle story clearly: peaks of 31–32% in FY2022–FY2023 when existing capacity ran full; compression to 17% today as ₹1,500 Cr of new capacity sits on the balance sheet but has not yet contributed proportionate revenue. This is the expected pattern — not a business quality deterioration — but it requires faith that the ramp executes on schedule.

The CCC chart is more concerning. The 139-day reading in FY2026 is the dataset high, exceeding even the previous spikes in FY2022 (119 days) and FY2024 (117 days). It reflects inventory build for new plant commissioning and extended receivables from overseas subsidiaries scaling rapidly. The combination of declining ROCE and rising CCC is precisely the warning configuration the industry tab identifies as the signal to watch: capital is being deployed faster than it is generating returns.

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4. The Metrics That Actually Matter

Five metrics, in order of how quickly they signal value creation or failure.

EBITDA per tonne is the single most important number. It is disclosed quarterly and reflects the processing spread, scrap sourcing efficiency, and value-added mix simultaneously. At ₹23K+ actual in Q3 FY26 vs guidance of ₹18–20K, Gravita is outperforming on the metric that matters most. If this drops below ₹18K for two consecutive quarters, the thesis is under stress regardless of what the P&L shows.

ROCE compression is expected but has a deadline. Normalisation to 22–25% requires Mundra (80K MTPA) and Phagi (45K MTPA) to reach 85%+ utilisation — originally targeted for Q2 FY2026, now pushed to Q4 FY2026 due to Gujarat licensing. Every quarter of delay is roughly ₹35–40 Cr of deferred EBITDA.

CCC at 139 days is the most actionable near-term risk. If CCC stays above 120 days into FY2027 even as new plants ramp, it signals either scrap inventory hoarding (operational risk) or deteriorating overseas receivables. Normalisation toward 90–100 days would release ₹200–250 Cr of working capital — a positive signal for FCF conversion.

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5. What Is This Business Worth?

Value is primarily determined by earnings power at normalised utilisation, with the reinvestment runway (capacity doubling by FY2028) providing the premium over current-year earnings.

At current market cap of ₹13,004 Cr and estimated EV of ~₹13,300 Cr:

• FY2026 EV/EBITDA: ~31× (EBITDA ₹435 Cr)
• FY2026 P/E: 34.3×
• P/B: 5.3×

These are premium multiples for a business with 17% ROCE and negative FCF. The justified scenario: if Gravita compounds revenue at 20%+ to ~₹8,000 Cr by FY2028 with OPM at 11–12% (EBITDA ~₹900–950 Cr) and ROCE recovering to 23%, EV/EBITDA compresses to ~14× — reasonable for a quality recycling franchise. The unjustified scenario: if Mundra/Phagi ramp slowly, revenue reaches only ₹6,000–6,500 Cr by FY2028 with EBITDA of ₹650–700 Cr, and EV/EBITDA stays at 19–20× — still pricing in significant quality but with less margin of safety. The stock does not work if ROCE stays below 18% beyond FY2027.

Sum-of-parts is not warranted here — all segments share the same scrap economics and processing infrastructure. The business is one economic engine, not a holding company. The investments line (₹413 Cr in FY2026) represents subsidiary equity, not separately-tradeable assets.

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6. What I'd Tell a Young Analyst

The thesis in one sentence: Gravita is a high-quality compounder in a regulatory-tailwind sector, currently mid-cycle on a capacity doubling that will either prove the model at scale or reveal that the economics don't hold beyond India's existing catchment.

What to track, in priority order: Watch EBITDA/tonne every quarter — it is the most reliable lead indicator. At ₹23K+ (Q3 FY26), the spread model is working. If it drops below ₹18K for two consecutive quarters, de-rate regardless of headline revenue growth.

Track Mundra and Phagi commissioning in every earnings call. Each quarter of delay at these plants defers roughly ₹35–40 Cr of EBITDA and extends the ROCE trough. The Gujarat licensing delay already pushed back one quarter; get comfortable with what the actual constraint is before the next quarter.

Watch CCC normalisation as the proof-of-concept for working capital management at scale. If CCC comes down from 139 days to 100–110 by Q2 FY2027 as plants ramp, it signals the team is managing the expansion well. If CCC stays above 120 through FY2027, dig into overseas receivables — that is where the problem will be hiding.

What the market may be missing: The RMIL copper acquisition (99.44% stake, Q4 FY26) is the most underanalysed optionality. If Gravita replicates its lead model — tolling agreements with copper OEMs, MCX copper hedging, 85%+ utilisation targets — the copper recycling addressable market is larger than secondary lead. It is too early to model RMIL contribution with confidence — but the framework is worth building.

The real bear case is that Mundra/Phagi underutilise for 18–24 months, CCC stays elevated, and Gravita's 34× P/E compresses to POCL's level (36.8× — actually similar, so perhaps to NILE's 11× if growth premium is questioned). Watch for margin compression in overseas operations as the earliest stress indicator — they carry less hedging sophistication and more FX risk than the India business.

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Based on FY2026 audited results, FY2025 Annual Report, and exchange filings.