Gravitas India IPO Review

Investors can consider giving the IPO from lead metal recycler, Gravitas India, a miss on account of the company's weak operational track record, and forays into foreign markets such as Ghana, Senegal, and Ethiopia without the desired stability in its domestic operations. The company also faces significant headwinds in terms of tightening primary lead prices, which could translate into higher raw material costs and margin pressures.



The company's post-issue enterprise value/tonne at the upper end of the band would be at an estimated Rs 65,000 per tonne which appears to be well above replacement cost. This is also far more expensive than other lead processors such as Nile (EV/tonne of less than Rs.20000/tonne) and Pondy Oxides and Chemicals (Rs 26,000/tonne).

The recommendation does not factor in the possibility of any listing gains on this IPO. Recent IPOs from small sized metal players have attracted significant speculative interest on listing.

Business model

Gravitas purchases lead scrap, which it smelts and converts into lead ingots, a limited amount of which is in turn processed into products such as grey oxide, red lead and litharge. The company has the capacity to produce 12,600 tonnes of lead ingots — the raw material for the production of automotive batteries, anti-corrosion coatings and paint pigments.

The company's consolidated net sales and profits have grown at an annual rate of around 85 per cent and 110 per cent respectively since FY-08 to Rs 167 crore and Rs 14 crore respectively. This was mainly due to improved capacity utilisation rates of the domestic lead-alloy plant (the major contributor to revenues), which was was around 40 per cent due to demand from automobiles and chemical sector.

Lead prices averaged at 25 per cent higher levels in FY-2010 compared to FY-2009. The company sources 70 per cent of its scrap from international markets due to the lack of an effective local scrap collection system. Raw material costs alone have averaged at 80 per cent of the company's consolidated sales over the last three years.

Lead prices have staged a further recovery, rising by 64 per cent in the last five months as a result of recovering demand globally. The low operating profit margins in its core business (around 8 per cent) may provide it with little breathing space during periods of rising commodity prices due to higher raw material bill. The company's pricing power isnot very high given that 62 per cent of domestic lead demand is being met by lower cost producers in the unorganised and import segment.

Domestic scenario

While the company has plans to set up lead smelter capacity abroad, its domestic operations continue to face challenges in terms of utilisation of capacity for value-added products and sourcing of raw material. The company's lack of geographical proximity to battery producers and a rapidly diminishing market for paint pigments have practically idled the company's capacity for 1,800 tonnes per year each of ‘value-added' grey oxide, red lead and litharge production.

India's demand for lead is likely to grow at 7-8 per cent per annum driven primarily by a rapidly growing automotive, chemicals and power back-up segment. The automotive segment, which drives grey oxide demand, accounts for 80 per cent of domestic demand. Despite this, Gravitas' geographical and raw material constraints have limited its ability to cater effectively to this demand.

Offer details

About 26.48 per cent of the company's post-issue equity will be owned by the public, which is at a price band of Rs.120-125. The company plans to utilise the proceeds of Rs 43-45 crore on expansion and working capital requirements.

via BL