Stock Review: Gravita India

 

Shares of Gravita India have outperformed other metal stocks and the benchmark Sensex in the past three months. Since listing in November 2010, Gravita's share price has more than doubled. Its premium valuation compared with peers seems to fully reflect its expansion plans and growth prospects.

Gravita India manufactures lead metal and other lead products using the recycling and smelting process. Through its subsidiaries, it offers complete end-to-end solutions, which include starting up turnkey plants to manufacturing lead products. It has 34 plants overseas which enable Gravita to trade lead acid battery scrap, a key raw material, across locations thereby increasing operational efficiencies.

Due to lack of availability of the ore, only a third of the lead production in India comes from mining. The rest is availed from secondary sources, mainly recycling of lead battery scrap where Gravita has expertise.

Domestic demand for base metal is growing at an annual rate of 10% largely driven by battery sales. The demand for battery-powered devices is also robust, driven by increasing sales of cars, inverter batteries, and generators.
To cater to the growing demand, Gravita recently acquired a 60% stake in KM Udyog. This plant, with an annual capacity of 7200 mt, will in-crease Gravita's annual capacity by 20% in FY12 and result in a 40% sales growth.

The company's net sales grew at 185% over the past four years. It more than doubled in the first three quarters of FY11 compared with FY10. It has a debt-equity ratio lower than one and gives a return on capital of 40.7%. At . 380, as on Wednesday's close, the stock trades at 30 times its 12-month trailing price earnings ratio.

Gravita is not cheap compared with bigger players in the lead industry like Hindustan Zinc or Binani Industries which are quoting at 14 times and 22 times, respectively. With a presence in recycling, providing plant and machinery and international trading of lead products, it has created a niche for itself. The company's higher valuation takes into account its unique business model. However, further appreciation in the stock price looks limited in absence of fresh trigger.