Gravita India reported a topline of Rs. 304 crores against Rs. 189 crores in Q1 FY18, registering a growth of 61% on account of increasing production number while the realisation remained constant in the quarter vis-a-vis Q1 FY18.
Gross Margins declined to 18.59% in Q1 FY19 vs 23.78% in Q1 FY18 due to led re-melting activity carried out during the quarter which affected the PAT directly registering a muted growth of 9.65% to Rs. 12 crores in Q1 FY19 vs Rs. 10.93 crores in Q1FY18.
We opine to SELL the stock and assign a target price of Rs. 100 based on PE multiple of 13x FY19 earnings implying a downside of 28% from the CMP of Rs. 140. At current price Gravita is valued at a P/E 18.2x FY19E PAT estimate.
1. Decline in Lead LME prices:
Gravita India follows a daily hedge policy on LME lead prices which neglects the commodity price risk and safeguards the gross margins. However, falling LME lead prices would mean lower topline reflecting the bottom line directly while the gross margins remain constant. While we envisage growth in volume numbers going forwardLME lead prices have fallen from the highs of $2,650 in February, 2018 to $1,975 in August, 2018. We had estimated Gravita India’s PAT growth on the assumptions of LME lead prices of ~ $2,400 in FY19 to be Rs. 90.9 crores. However, citing to the recent fall in prices if LME lead sustains at ~ $2,000 in FY19 Gravitas PAT will be lowered by ~ Rs. 38 crores.
Gravita India Q1 FY19 realisation came in at ~ $2,421 vs ~$2,482 in Q4 FY18. Following the drop in LME lead prices by 17% in the month of July and August we expect realization to come in significantly lower going forward. Declining realisation coupled with increasing employee cost, other expenses and depreciation on account of expansion activity would further dampen the PAT then our expected PAT in FY19.
EBITDA per Kg in Q1 FY19 came in at ~ Rs. 12.5 but management has guided to maintain it at Rs. 15 going forward which seems tough. Even if the company achieves Rs. 15 EBITDA per Kg, the PAT would arrive at ~Rs. 75 crores bringing the valuations to 13x FY19 estimate which we think is fair and hence leaves no upside with these bullish estimates either.
LME lead price movement from August 2017 to August 2018
2. Decline in Gross Margins
Even after adopting the LME lead hedging policy in June 2016, the gross margins have declined in the past two consecutive quarters on account of lead re-melting activity. This activity involves buying re-melted lead from the domestic market, refining/alloying it and exporting it against the order book and is not to be confused with the traditional way of business. There was 1700 tons of re-melting activity carried out in the quarter which reduced the gross margins to 18.59% against the traditional 22 – 24 % gross margins. As guided by the management, this activity is supposed to be carried out till Q4 FY19 and the gross profit margins will only see recovery in FY20.
3. Outlook and Valuation
Declining LME lead prices coupled with lead re-melting activity (lower gross margins business) would impinge the PAT going forward. Assuming LME lead prices to sustain at $2,000 for the remaining three quarters, we expect Gravita India to report a PAT of Rs. 52.92 crores in FY19. At the CMP of Rs. 140, Gravita India is trading at 18.3x FY19 earnings estimate. We recommend to SELL the stock with the revised target price of Rs. 100 assigning a PE multiple of 13x FY19 earnings with an EPS of 7.69x .
Gravita India Initiating coverage: http://www.pmsec.in/blog/gravita-india-initiating-coverage
Gravita India Updates post initiating coverage:
Links to updates:
This document has been prepared and compiled from reliable sources. While utmost care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the Company nor any of its Directors, Officers or Employees shall in any way be responsible for the contents. The Company, its Directors, Officers or Employees may have a position or may otherwise be interested in the investment referred in this document. This is not an offer or solicitation to buy, sell or dispose off any securities mentioned in this document.
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