Gravita's Q2 FY18 earnings were in line with our
estimate. with a Q2FY18 PAT of Rs 14.23 Cr
& H1FY18 Rs. 26.13 Crs. Gravita's Performance is in line with our annual PAT estimate of ~Rs. 55 Cr.
Spot lead LME prices are at ~2450$/ton well above our threshold of 2100$/ton. Drop in prices of LME lead would plunge the company’s revenue. 81% of the Lead volumes came from base lead and
refined lead whereas, 19% of the lead volumes came from lead alloys and value added products contracted at 107% of LME lead demanding higher margins.
In the coming quarters, we expect growth in the company’s topline and PAT on account of increasing capacity and better utilization levels.
We continue to endorse our previously
established view on the stock and opine
investors to HOLD.
Earnings call KTA
1. Gravita India reported a strong quarter on the grounds of robust lead and aluminum volume. Capacity expansion at
Chittoor Plant of 16,000 MT led to the total capacity of 28,000 MT operating at 75% utilization level. Chittoor plant
insulated contributed Rs. 47 Cr. to the topline.
Volume growth for the quarter was as following:
Increase in EBITDA per ton was on account of soaring commodity prices, economies of scale and increasing production
capacity. EBITDA per ton was as follows:
2. Interest cost for the period came in higher than expected at Rs. 5.6 Cr on account of 70% of the sale in Q2 funded by domestic funds which are at higher interest rate rather than the international funds. Also, there was an increase in short term debt due to working capital requirements. However going forward, the interest cost will be closer to Q1 which was
at Rs. 2.45 Cr rather than Q2.
Management comments & Interpretation
1. Companies ambitious plan to increase lead recycling capacity to ~2,20,000 tons seems achievable with expansion plans in Mauritania of 4000 MT in January, 2017 and an addition of furnace at Jaipur plant increasing the capacity by 33% from 38,919 MT to 50,919 MT. The expansion plans are in line with our estimate and would provide a roadmap for the
company going ahead. The expansion plans would require CAPEX of Rs. 150 Cr in next 1 – 1 ½ year which could result in company not generating free cash flow, is worrisome.
2. The expansion plans are met with increasing utilization levels, with Chittoors plant operating at 75% utilization from 30% utilization levels in Q1 FY18. Managements guidance of 90% utilization levels seems achievable but with a note of caution on the lead LME prices. Lead contracts are hedged completely not affecting the margins of the business but can
affect the revenue as a whole. Lead prices seem to have stagnated driven by easing demand at the spot market.
3. There is 30 % increase in lead procurement in India due to GST implementation. Currently, Gravita India procures 13% of its scrap from domestic route while the rest comes from the international route. Going forward, objective is to have 20% of the scrap through domestic route and 80% from international route. Implementation of e-way bill can improve the procurement ratio to 30:70. However, at present domestic scrap is 6% - 7% costlier than the international scrap.