Gravita India Limited (GRAVITA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Results Conference Call of Gravita India Limited, hosted by Emkay Global Financial Services. We have with us today Mr. Yogesh Malhotra, Whole-time Director and CEO; Mr. Naveen Prakash Sharma, Executive Director; and Mr. Sunil Kansal, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Sabri Hazarika from Emkay Global Financial Services. Thank you, and over to you.

Yes. Good evening, everyone. I would like to welcome the management of Gravita India and all the participants to this Q2 FY '22 Conference Call of Gravita. Thank you, everyone. So without any further delay, I shall now hand over the call to Mr. Yogesh Malhotra, CEO for the opening remarks. Over to you, sir.

Yes, thank you. Good afternoon, everyone. Happy Dhanteras, and a very warm welcome to Gravita's Q2 Financial Year 2022 Earnings Call. I hope you and your families are staying safe and healthy. We have already circulated our earnings presentation, and I hope you have had the opportunity to go through the presentation, and we will be happy to take any questions afterwards. We would begin this call with a brief discussion on quarter's performance and financial results. The second quarter for the fiscal year saw improvement on both year-on-year and quarter-on-quarter basis as it recovers from first and second wave of pandemic, respectively. I'm pleased to present that Gravita has continued to maintain the same growth momentum in this quarter as well. Our revenue from operations stood at INR 446 -- sorry, INR 546 crores, registering a growth of 61% on a year-on-year basis and 22% on sequential basis. Domestic business continues to lead revenue growth with 64% share with growth of 47%, while overseas business contributed 36% with growth of 94%. All other segments lead, aluminum, and plastic have posted positive growth. In terms of volume price mix, top line growth was supported by both increase in volumes and prices. Volume growth was 30% on a year-on-year basis to 34,000 metric ton. Value-added products continue to see healthy increase in contribution, stood at 45% of the total revenue, wherein we get better margins. Company has delivered an adjusted EBITDA of INR 50 crores, a growth of 61% on a year-on-year basis from INR 31 crores in the same quarter last year. EBITDA margins increased by 82 basis points to 9.2% compared to 8.4% on a quarter-to-quarter basis. Margin's improvement was driven by higher volumes, coupled with more contribution from overseas business. Net profit for the period was INR 37 crores compared to 11.5 crore INR in same quarter last year. On the profitability front, overseas business contributed 76% of the total profits, leveraging its strength from closer proximity to procurement sites as well as clients and higher operational efficiencies in the business. We are also planning for a pilot project of rubber recycling and copper recycling at overseas locations. Once they are successful, we will be replicating the same at other locations in the next 3 to 4 years. I would like to highlight that Gravita India is well-positioned to maintain its leadership position in the recycling industry through superior product mix, improving operational efficiencies in our plants, and expanding scrap collection networks, which will help us to create value for all shareholders in the long run. Thank you very much, and now I would like to open the floor for question and answer. Over to you.

[Operator Instructions] First question is from the line of Sudhir Beda from Right Time Consultancy.

A healthy congratulations for a splendid set of numbers, sir. And I think your entire team Gravita deserve the hearty congratulations and appreciation from the shareholders.

Thank you. Thank you so much.

Sir, my questions are like, if we see Q2 this quarter, our EBITDA margin of lead is INR 15,000, whereas the last year -- sorry, INR 15,600. But Q1, it was like 12,500. So is there any reason for such a fluctuation of, say, INR 3,000 sequentially?

So basically, the contribution from overseas has gone up, which generally gives us higher margins. So this quarter, exceptionally, the overseas contribution is around 76% of the total profits. So that is why the EBITDA margins are looking a little higher. And also because the LME is at a higher this thing. So although, in rupee terms -- I mean, percentage-wise, it's not that big, but in rupee terms, it is looking to be a little higher compared to last year. And in addition to this, volume growth is also there as compared to the Q1. So basically, we get the economy of -- benefit of economy of scale also. So that's also improved the EBITDA quarter.

No, volume growth is actually -- Q1, our volume was 22,000 and...

Yes, this time, it is 27,000 approximately.

Volume is showing 19,000, Q2.

19,000 was there last year.

Sorry. Yes, understood.

If you compare that to Q1 of this year, it was 22,000.

It is 22,000. Right. And so this kind of margin is sustainable or if the LME rates comes down, then our margin also will come down?

It will change slightly with the mix of overseas versus the domestic contribution, but it will definitely be in the line of around 8.5% to 9% even going forward. So you can take approximately 14,000 to 15,000 is a range for quarter.

Understood. Yes. And our aluminum and plastic volume is down sequentially and also Y-on-Y. So is there any particular reason because aluminum is giving a higher contribution, higher margin, but our volume is down this quarter compared to the Q1 of '22 and last year also -- compared to last year.

See this is partially because we have just set up a operational -- I mean, production facility in Mozambique this year, which only started at the end of this quarter. So the volume, which is not coming from that facility is going forward. So we started keeping all the scraps. Earlier we were selling that scrap to --sending that scrap to India. So we held that scrap in Mozambique and from now onwards, this quarter onwards, their production capacity will be -- to be operating. This will be covered in the next quarter. This will be covered in this quarter.

Okay. So next quarter, we will see a higher volume as far as aluminum is concerned?

Yes.

And sir, my last question is about cash flow from the operations is almost nil because of the stock building for the Mundra power plant. So this understanding is right or how it is because we have a INR 77 crore increase in the stock. So can you give color to it?

Yes. Basically, we did already give the CapEx of approximately INR 35 crores for establishing this Mundra plant. So this is impacting one time, but definitely, as far as we are going to start this Mundra Project Phase 1, so the inventories will also be diluted, and we will be start generating cash flows. So we are starting the Phase 1 in this quarter only.

So basically, this higher inventory is because of the inventory builder running up to the Mundra plant.

So basically, inventory is build up for upcoming plant in Mundra.

Next question is from the line of Pritesh Chheda from Lucky Investments.

Yes, sir. My question is on the cash flow side and the changes in net working capital incremental that you see in the business. There was this one thought about imported scrap not being used on the Indian plants and changing working capital on account of that. So where are we and what working capital cycle you're are operating, let's say, now and where are we heading towards, sir?

Sure. So earlier, we used to -- if we talk 1 year back, we used to do working capital cycle of approximately 90 days. But at this moment, with the more domestic scrap and with the scrap coming in from the OEMs, where we are not going to pay them and so we have reduced the working capital cycle to 77 days at this moment. And -- but we are targeting further reduction up to 60 to 65 days in next 1, 1.5 years.

This is India?

Sorry?

This you mentioned for India, right?

So this is blended working capital cycle. So India will be slightly more, but yes, the blended should be 60 to 65 days.

Okay. What I see as your cash conversion cycle is about 60 days is what I see on consolidation, which is India plus international put together. 60 to 70 days is what I see.

Yes.

And at this 60 to 70 days, where do you see it heading to?

So cash conversion cycle, if you're considering only inventory receivable and payable...

Yes, sir.

That should be close to 55 days in next 2 years.

So 70 becomes 55.

Correct.

And the total working capital cycle remains at 70, with 15 days some other line items?

65 to 79.

Which was earlier 85 to 90.

Correct.

So sir, let's say, a cash conversion of 55 days or at let's say, a total working capital cycle of 70 days, the cash generation in the business may still not happen. So how do we think here and what are other efforts to improve the cash generation, sir?

So basically because we are now in the phase of investing more and more for the capacity development like we are doing the project in Mundra. So once this project will be operational, so we'll be facing -- we will be reduction -- we will be doing the reduction in the working of the cycle. So going forward, the cash generation will be significant as compared to what it is today. So it will be, positive cash flow will be start generating from this reduction in working capital.

But sir, the number that you mentioned and the margins that you would operate, you may not have cash flow generation, sir.

We are definitely -- so definitely, we will be generating the cash flow because when we have 60 days of working capital cycle, so it will be -- and margin is also improving. So we will -- going forward, we should have a 10-plus kind of EBITDA margin because we have already reached to 9.9-plus at this moment. And with the more growth coming in from the other verticals where we have lower working capital cycle and higher margins, so we will be cash positive on this in future.

Okay, sir. Okay. And sir, what is the expansion plan other than the 24,000 tons in Mundra? So you are at 106...

That is Phase 1. We are coming up with another 24,000 in Mundra. And also, we are expanding the capacity of our existing plants in Africa.

So of this 160,000-ton capacity that you have, will add by 24,000 in Mundra Phase I this year, right?

Yes.

And when will the Phase 2 come?

Phase 2, another 24,000 tons.

And when it will?

Approximately next year by June.

And what are you adding at Chittoor and Ghana?

So Chittoor, we are adding another capacity of approximately 20,000 tons and Ghana should be close to 7,000 to 8,000 tons.

And when are these capacities coming?

So Ghana will start somewhere around March '22, and Mundra -- Chittoor will start somewhere around December this year.

December '21, Ghana is March '22. So basically, when we start next year, FY '23, we'll have 160,000 plus 24,000 of Mundra plus 20,000 of Chittoor plus 7,000 of Ghana. We'll start at 211,000 tons.

Yes, correct.

And the capacity utilization that we see at 34 divided by 40, which is at about 85% to be 160,000-ton capacity. What is the capacity utilization do you see at 211,000 ton next year?

It would be around 75% to 80%.

And that's the max you can do or you can take it up higher?

Yes, we can go up to 80%, 85%; 80% to 85%, but that is an optimal level that we are considering right now. We can go up also but that is the basic bottom line number that can always happen, 75% to 80%.

So the current quarter at 34,000 ton, which is at about 85% utilization is kind of a optimum peak utilization for your type of business, perfect?

Yes, correct.

Next question is from the line of Anurag Roonwal from Moneybee Investment Advisors.

Sir, congratulations on a great set of numbers. Sir, 2 queries. One, sir, Mundra. I just wanted to know which quarter is this new capacity comes from, I mean, Q3 or Q4? Secondly, I wanted to understand more in terms of our EBITDA margin for the overseas operations versus the domestic operations. I wanted to know what's the kind of margins that you make in the overseas operation as compared to the India market?

Yes. So Mundra definitely would be operational in Q3 only. So probably this month itself we'll start the operations. As far as overseas margins are concerned, the total EBITDA margins, we have -- so margins in overseas is -- on percentage-wise, it is approximately 15% to 16% of our EBITDA margin.

Okay. So what I was trying to do outside, I tried to sort of reduce from the consolidated numbers in standard numbers and I'm getting the resultant number. And from that resultant numbers, I believe that would be for the overseas operations. Is that the right way to sort of calculate?

Not exactly. Not exactly because there are certain goods which are moving from overseas to India also. So there is some overlap also there between India and the consolidated number. So the exact number is 76%. So 76% is the contribution in the bottom line, which is coming in from the overseas business and 24% in the bottom line from India business. And if you talk about revenue number, so revenue is 64% from India and 36% revenue is coming up from the overseas business.

Okay. And one more question, sir, if I may. Sir, my understanding was that the EBITDA that we sort of track in our business, so we track the EBITDA in absolute terms basis rather than in percentage basis. So in that case, I wanted to understand what's the reason for the fluctuation that we see in Q2 versus Q1.

It's not exactly -- basically in percentage basis only. In the sense, if the earning is higher, so the margins in between would remain same. So it's mostly in percentage basis that we calculate EBITDA. It's not in exactly rupee terms. When we talk about rupee terms, it's between a specific LME number that if it is between INR 2,000 to INR 2,200 to INR 2,300, that is from where we derive the numbers in absolute.

Okay. So we are tracking it in terms of margins?

Yes.

[Operator Instructions] Next question is from the line of Rahul Bhangadia from Lucky Investment Managers.

Sir, 2 or 3 questions on the balance sheet side. One is, how much have we already invested in Mundra for the capacity expansion, and does it stand as capital work in progress on the balance sheet, which is INR 41 crores right now?

So we have already restored approximately INR 35-odd crores in Mundra for investing in land building and blender machinery till now.

So the capital work in progress that we see is mostly in Mundra, is that fair to understand?

Yes. Mundra and to some extent Chittoor.

To some extent Chittoor, yes. So INR 41 crores, you have invested INR 35 crores in Mundra, right?

Yes, correct.

Okay. And sir, how much inventory would you have built up for Mundra, roughly?

So again, approximately INR 30 crores, INR 35 crores.

For which the production is yet to start, right?

Yes. So it's not exactly in Mundra. So it may be in like other plant line in Jaipur or Chittoor because inventory will be processed in Jaipur or Chittoor only but then the capacity will be free from the whatever import scrap will be started processing in Mundra. So then capacity will be free for domestic and then that additional inventory will be processed in Jaipur and Chittoor.

Okay. So that is first question. Second is, if you could just give us a flavor of what are the other current assets at INR 134 crores that stand in the balance sheet? It was INR 85 crore in March, what is it today and what is the breakup roughly of the INR 134 crores that stand there?

So INR 134 crores is the -- basically advances also to vendors and mainly to some like some government receivers like GST and all. So major part is advances only, which is close to INR 50-odd crores. And there's some GST part, which is approximately INR 20-odd crores.

Okay. So that, as you had also mentioned in the previous answer to the previous question, that is broadly that 10, 15 days of additional working capital besides the inventory data minus payable section that you mentioned basically.

Correct.

Okay. So that was the second, sir. If I can have the third. Sir, your payables in the last, let's say, the 6 to 8 quarters have gone up a little faster than your inventory itself, and which has meant -- also mean that on inventory -- the overall net -- NWC, net working capital has come down. Is this basically because of your back-to-back arrangement with corporates or you have been able to negotiate better credit terms with your existing vendor, how does this work out?

Correct. So basically, what is happening is that we are getting more and more scraps from these OEMs contracts in India. So the arrangement with them is that we are not -- we are taking the inventory from them. We are purchasing from them as a scrap and it is lying in the inventory. And on the second side, it is also in lying on the paid results. And we don't need to pay that, and we just need to convert into the matter and supply it back to them. So that's the arrangement and that's the improving working capital cycle for us because that's not inventory -- practical inventory for us.

So how much of this INR 436 crore inventory that you have on the books will be under that arrangement?

Approximately INR 70 crores to INR 80 crores.

INR 70 crores to INR 80 crores. Okay. And sir, my final question, if I may. Sir, you have mentioned previously also that you kind of hedge all of your inventory nowadays -- for the last maybe 4 to 5 quarters and before that as well on the LME exchange. You have also given a note to account where you have mentioned some INR 7 crores profit, which has been netted off against the loss. I just wanted to understand, sir, is it not a disclosure that you should be making probably in our annual report or something because I couldn't find anything in the annual report disclosing your positions in LME?

So basically, till now, we were not doing it. But definitely, we are seeing some questions on that. So definitely, this year onwards, we will start disclosing this also other than the foreign contracts. So LME commodity contract also we will be displaying.

Can you disclose right now, sir, how much -- what is the outstanding contract with -- roughly, what is the tonnage that you are outstanding on the LME as of September?

So there are 2 parts to it. Whatever inventory we have against that, one is that we have already have the customer orders in there. That is one part of the hedging. The another part is the scale contract we have on the LME exchange, which is approximately -- at this moment, approximately 6,000 tons.

Okay. So 6,000 tons is what you would have on your LME exchange right now as a contract?

Correct.

[Operator Instructions] Next question is from the line of Tanay Gabhawala from Emkay Global.

Congratulations on a good set of numbers. I had 2 questions. So the first question is, you had kind of mentioned that about 30% of lead and lead batteries market shares with the informal sector. Just trying to understand how do you see that going forward and any potential kind of volume benefit you can see from that shift to formal sector? And the second question is on your planned CapEx for the next 2 years, if you could shed some guidance on that.

So we foresee that this informal sector will shrink the policy which are coming, particularly in case of lead, which is that battery-based management rules. So the guidelines are under formation. There will be APR penalties also. So there will be a lot of shift going to happen in formal sector from the non-formal sector. Second is that the coal prices, energy crisis, and green-energy concept, which is where recycling uses minimum amount of energy as compared to primary production, so these both things will bring this sector more from informal to formal.

So if we talk number about -- number wise, approximately 30% informal sector -- sorry, 70% informal sector will come down to 25% in the next 3 to -- 4 to 5 years. And because we are the only company in India from North to South, multi-locations, so we will be the largest beneficiary of this shift. So we are targeting -- because whatever domestic scrap we are targeting, so that is coming out of this policy shift obviously.

Okay. Great. And about the planned CapEx?

So planned CapEx, at this moment, we are taking -- as we discussed, that we are coming up with the Mundra plant and from a capacity expansion in our existing plants also. So we are planning to have approximately INR 60 crores to INR 70 crores each year up to next 2 years and we are also doing some pilot project in rubber recycling and copper recycling. And once it is successful, then we can replicate it. So that will be additional in next 3 to 4 years.

[Operator Instructions] Next question is from the line of [ Jignesh ] from Emkay Global.

Congratulations, sir, for the great set of numbers, sir. My question is, sir, post this Mundra plant comments, what kind of logistic cost you will save and what kind of profitability will improve, sir, from this level if you can quantify?

Actually, what we are doing correctly is we are -- whatever scrap we are importing, we are bringing it to our inland plants. So for example, Jaipur and Chittoor. So the overall cost is around 2% to 3%, bringing them from port to the plants. So we will save some amount of these costs when we process this material in the existing -- in the Mundra location only. So that would be around 2% -- in the vicinity of 2%. But in addition to that, we will also save some inventory costs because there is an inventory carrying cost for bringing that material to Jaipur and then exporting it back to Mundra. So which is around another 7 to 10 days inventory carrying cost will also be reduced.

Okay. And how about overall profitability will improve from this level? I mean, if you can quantify some numbers.

So import is approximately 50% at this moment for India production. So this 2% gain on import parts. So it will take approximately 0.75 -- 75 basis points to 100 basis points in EBITDA margin -- overall EBITDA margin. Okay.

And my second question is like, right now, the major portion is coming from lead side. How about business like comfortable -- you guys are comfortable in business like lithium, copper, and other segments, sir?

Yes. So as Sunil has already mentioned that we are putting up 2 pilot projects in Africa for copper and rubber. So those 2 verticals will start by this year-end. And probably in the next year, we'll get some numbers from those 2 verticals. In terms of lithium-ion -- actually, we believe that there is still some time for lithium-ion volumes to come in India. We believe that it will take around 7, 8 more years. So we are already in discussions with some technology companies, and we will probably start some pilot projects for lithium-ion in India also in the coming 1, 1.5 years.

Next question is follow-up from the line of Pritesh Chheda from Lucky Investment.

Yes, sir. So to one of the questions that you answered to a participant on the payable days. So it's like do you get a credit of about 100 days on the metal that you procure from the corporates?

So how it works is that we have a -- I mean, all -- we procure on behalf of the corporates. So we take it from their dealers, their distributors, bring it to our factory, process it, and then give them finished good in lieu of the procurement that we do on their behalf. So there is no credit for the scrap that we collect on their behalf.

So it is not exactly 100 days. But yes, because it is higher at this moment because we don't have the enough capacity to compensate. So we are building up the inventory and waiting for the Mundra to start. So once Mundra is starting, then definitely, inventory will also go down and these payables will also go down.

Okay. So then you would need -- you will not -- you will also cut down on this inventory being procured from dealers from -- on bond you have from the corporates. So automatically 15, 20 days of extra payable that you got should also come down, right?

Yes. So it will not have any impact because the inventory will also go down and the payable will also go down. But as soon as we have import cut down on India, so then definitely the overall working capital cycle will come down. So that's the target.

Yes, sir. That part I understood, import getting replaced, so import coming to India and getting processed at Mundra and reduction in net working capital. That part I understood. But this part of payable increase will also -- these expanded payable days that we see because of this arrangement of corporate -- on behalf of corporate purchase, that also should soften a bit, right?

Yes. But at the same time, the inventory can also reduce because we -- this payable per se. What is happening is that we have -- we are carrying inventory on their behalf and there is a trade payable also showing in the books. So once the trade payable will go down, the inventory also of the corporate that we are holding will also reduce.

Obviously. But sum total -- for my first question that you answered, sum total, the net working capital cycle should come down from 85 days to 70 days, which includes that short-term loan where you big advances, et cetera, everything gets captured there, right, 85 days coming down to 70 days?

Correct. Yes.

And sir, last question on margin. So for us, there were phases of 5%, 6% margin, and there has been a long phase of 7%, 8% margin. First of all, I wanted to understand the variation reason for these and incrementally, where the margin is at about 9% this quarter, where do you see the margin stabilizing at a certain percentage number, which you could help us understand.

Yes. Basically, when we were in the range of 5% to 6%, at that time, we were not fully hedged on the metal side. So that was the time when we were partially hedged and there sometimes, it was 8% to 9% also, sometimes, it was 4%, 5% also. So since last 2 years, we were on the fully hedged model and that was a time when we started then improving the margins, operational margins, fully hedged margins from 6% to 8.5%. So at this moment point, we are in the range of 8% to 9%, and 9% -- 8% to 9% is the -- sorry 8.5% to 9.5% is a stable margin we can consider at this moment. But with the more volumes coming in, with the economy of scale -- the limit of economy of scale, with the more contribution coming from the overseas business, with a saving of the logistic cost as we are reducing the imports in India, so with this all -- and more contribution coming in from the value-added products. So all these efforts are taking us from this 9 to 10 kind of percent a stable margin from -- improvement from 9% to 10%. So that's the targeting for next 2 years.

Sir, one clarification here. You -- since you are expressing as -- in percentage terms, your business model would have also gained from appreciation in the base metal prices. So what it was at 5%, let's say, at a point in time, 5%, 6% at a point in time, does it get influenced by lead price moving from $1,700 to $2,500 or the other prices moving the way they have because we have always expressed it as a percentage and never expressed it as EBITDA per kg. So if you could just explain that part? And second, when you're talking about hedging, even today, when you were giving out a hedging number, you said only 6,000 ton of contracts are standing on LME. That is 25% of your quarterly volumes. So not even 25%. So 6,000 divided by 34. So that's about 20% of your quarterly volume. So I couldn't understand this 100% hedging that you mentioned?

Yes. So basically, if you see our total inventory carrying cost, inventories are basically 90 days only, 70 to 80 days, total inventory in the group. So if you consider that, then it is around 25% to 30% of the total inventory that we are carrying is hedged on LME. Yes. So balance 75% are -- is held with the customers only. So we have priced the customers in advance. So what we do is we have pricing arrangements with customers where we sell them on M minus 1, M minus 2, M minus 3 basis. So whatever we are buying is directly priced with the customer first. And whatever is left is then sold on LME. So this is generally to the tune of 20% to 30% only.

Okay. Buying from customer and selling to the store customer. Buying from some other customers and selling to other customers, that is back to back.

That is back to back.

And whatever there is no customer, it is hedged on the LME. That's how you say you're 100% hedged.

Yes. That is how we are 100% hedged.

So the part which was not there earlier, was this 25% part where we were not hedging on LME, that was not there earlier or this back-to-back customer was not there earlier? What was not there earlier?

What we were seeing when receive -- when we started hedging, what we did was that on day 1, whatever we were buying, we were selling on the -- to the customer or to the LME. But whatever inventory was there in the system, we were not hedging. So whatever profit or loss due to that inventory carrying cost. I mean the inventory that we were carrying was not hedged.

Which means, 25% of your business, which never had a customer earlier was not hedged on LME on year.

LME is not like that and so, let me explain. So basically, when we started this hedging, so we started that from X date, we will be doing the 100% hedging on that to back to back basis. But on that date, a particular inventory was always lying in our plant, say 10,000 tons. So this 10,000 tons was not at that point of time. So over end above whatever we were buying, we were selling. But that 10,000 tons were left as a unhedged position on the balance sheet, which we held 2 years back, which we also started hedging 2 years back. So we started considering the base inventory also and whatever buying is -- today buying is whatever buying, that is also being sold. So inventory is also sold now and what -- is sold. So this inventory part was not there at that time. So what we were thinking was that initially, when we started hedging, we started -- we thought that this is iron stock that is, in any case, always going to remain in the system. So we will not hedging that part, that iron stock part. But now we've started hedging that part also because suddenly, if the LME goes down for a long period of time, then that starts taking effect. So we have started hedging the iron stock also now. Do you understand?

Yes, sir. Yes, sir, I understood.

Next question is from the line of [ Aditya from Articlight Capital ].

Yes. Am I audible?

Yes, you are.

Yes. So I wanted to ask you, now that the policy has changed in our favor as compared to the earlier -- like the informal sector was the main part of the market and now it's in favor of the formal sector. So now what will be our biggest challenge to take the market share away from them?

There are 2 challenges. First of all, we have to build up the capacities because we were -- we only had capacities because we were not getting any formal scrap in the Indian market. So the first thing that comes to mind is the capacity increase. Once that happens, then the second part will come because currently, we are not going to the corporate. We are not talking to corporates also because we do not have enough capacities to process the scrap. And also then, there is some -- I mean, the market leaders have started going by the book. They have started following the rules, but then there are other companies also who are just waiting and watching. So probably, it will take some time, 2 to 3 years for these -- all these companies to then start following the rule. So probably, that is why we are estimating that in the next 4 years, the formal sector, which is at currently 30% will go up to 75% and because we are the largest player, and we have operations in majority -- in PAN India business, so we will take the larger chunk of this.

Okay. So to summarize this, first is the capacity and the second is that the customers also need to start getting involved in this?

Yes. So if you've secured an exposition. Currently, the customer cannot follow the rules because there are not enough formal recyclers in the country that can process all those 12 if they start taking it back.

So there's a supply-demand gap, which we can sell with our increasing capacity, correct?

Yes.

Yes.

Next question is from the line of Sunny Agarwal from Jku Impex.

Yes. Sir, firstly -- sir, I have 2 questions. Firstly, I want to understand, sir, that Gravita is a 30-year-old company, but most of our revenues are coming from lead. So I want to understand, is it that difficult to enter into other areas of recycling and what has stopped us till now from diversifying into other areas?

No. It's not very difficult, is what we have realized. But once, see, actually, if you see they are very similar. I mean, recycling business is very similar, especially if you talk about metal recycling, it is -- the practices are similar. But then when you go into detail, your workforce, your technology, manpower, everything is different when you go into a different segment. But yes, once you enter into those verticals, I mean, going to the second vertical was difficult. It took us probably 25 years to go into the second vertical. But since then, now, we have realized that we can go into other verticals also. So if you see in the last 3, 4 years, we have already added 2 more verticals, we are adding 2 more verticals this year. And probably going forward also, we will keep on adding these verticals because we keep certain synergies, both at the procurement level and then at the operations level, where we can take advantage of these synergies.

Okay. So sir, in the next 4 to 5 years, I assume we would be a full-fledged recycling company covering various verticals, I assume?

Yes, definitely.

All right. So I have one more question, sir. Like I have read multiple times that by 2025, I mean, Gravita is looking at a turnover of around INR 5,000 crores. I mean your target is to double your revenues in the next 3 years. That is what I understood by a presentation and various other. So sir, are we on the track to achieve that?

Yes, we are on track. If you look at the past 3 years in terms of profits and volumes, we think we are going at the right age, although we believe that the first -- I mean, the past 2 years was basically in building up the capacities, which we started realizing now. So the capacity that we are building this year would start giving us effect in the next 2 years. So we believe that we are very equipped go to the number that we have already projected. We think that it's very much possible. And we -- and when we talk about the 5,000 tons, we are talking about the existing verticals only...

INR 5,000 crores.

Yes. Any inorganic growth in this.

Next question is a follow-up from the line of Rahul Bhangadia from Lucky Investment Managers.

Just a broader question on this formal-informal thing. It's been repeatedly mentioned and discussed that formal is 30%, which will probably move towards 70%, 80% in 3, 4 years. If you could just give us a sense of what is it that differentiates the formal? What are -- so basically, starting from what are the hazards that this whole lead processing thing faces in terms of human hazard or environmental hazard, what are the precautions that a formal guy takes, which an informal that doesn't take? I'm just trying to understand what is the moat here or what is the entry barrier, sir.

So basically, you can define formal or informal sector when we define it, we define it from the -- basically from the tax purposes, not so much from the environmental perspective.

Okay. So that is how you are looking at it. And in that sphere, you're saying, basically, you are the biggest guy. Any other major competitor here in the organized space in India?

In lead, there are 2 or 3 public limited companies other than us, one is Nile Limited, and then there is Pondy Oxides. In terms of multi-locational and basically, smelting facilities, we are much bigger than both of them.

Next question is a follow-up from the line of Anurag Roonwal from Moneybee Investment Advisors.

Sir, in our vision statement, we are sort of mentioning that when we talk of revenue, we are saying that we will grow our revenue by 25% CAGR for the next 4, 5 years. So first of all, can you sort of divide this revenue CAGR in terms of how much will be the volume growth and what's the kind of price growth that you're expecting in this? And secondly, when we talk of profitability, we are mentioning that will grow by 35%. So this, I wanted to get more color on this in terms of -- so when we talk about margins, we are saying that the margins are being tracked on a percentage basis. So how will falling metal prices scenario impact these numbers?

So when we talk about 25% CAGR, it's basically on volume basis. So -- and the second part is that we are taking various initiatives as we mentioned that the overseas business is increasing in India, we are importing in Mundra, we will be saving logistics costs to quite an extent, and then finance cost also will be reduced. We are reducing the inventory. Inventory also, so working capital cycle will reduce, which reduces our finance cost. Apart from that, we are also focusing on value-added products, which will give us better margins. We are targeting 50%-plus value-added products. And at the same time also because of the volume increase, we will get economies of scale, which will increase the profitability growth. Not only this, we are also -- as you've seen that plastic and aluminum has also started giving us better results, our profitability in those segments is much better. So we believe that going forward, when these segments become bigger, the profitability will also increase. So there are many such things that we are very much sure that profitability growth would be much bigger than the revenue growth that we'll do in the years to come.

And even in case of lower metal prices or lower selling prices also, this 25% growth will be there definitely because we have considered this even at the lower prices also.

As there are no further questions, I now hand the conference over to the management for closing remarks. Over to you.

Yes. Thank you, all. Thank you very much for participating in the earnings conference call. It has been a pleasure interacting with all of you. As closing comments, during the quarter, the company has been able to achieve a better-than-expected performance. We expect better operational performance coupled with volume growth in the upcoming quarters as well. As I mentioned earlier, the company is focused on optimizing its overseas manufacturing facilities, along with improving its scrap collection network in India to help improve its profitability by reducing logistics costs of importing the scrap into India and also reducing working capital cycle. Additionally, the company continues to focus on improving product and market mix to get better margins. We value your continued interest and support in Gravita. Wishing you all a very happy Diwali. Thank you.

Thank you very much, members of management. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes today's conference. Thank you all for joining us, and you may now disconnect your lines.