Business Analysis 20: Ganesha Ecosphere Ltd
They have guided 25-30% topline growth over the next couple of years with long term EBITDA margin around 16-17%
Though charts don't give conviction, yet it gives you an overview of a stock's journey over the years. Charts tell a story. It's a story about how a business performed over the past few years.
Don't worry. I'm not a chartist. I'm not going to delve too much into charts today. In fact, I also don't get conviction through any technical indicators. I know you all love fundamentals. You care more about businesses.
So, as you are aware, we will discuss Ganesha Ecosphere. Why did I choose this business today? Because I love the chart first and then its uniqueness along with the opportunity size.
It's in the business of recycling. It's a leading PET waste recycling company in India. The company also does manufacturing of recycled polyester staple fibre, spun yarn and dyed texturized yarn.
Majority of their revenue comes from domestic market with more than 90% share. And the rest comes from export market. As per FY24, revenue mix -
Spinning segment - 65% + Technical non-woven segment - 25% + Stuffing segment - 10%
They are one of the leading recycling company in India as well as globally with 500 product variants, 400+ customers, 300+ supplier network, 6 manufacturing facilities across India and Nepal. They have a total recycling capacity of 196440 tones/yr across products like RPSF, rPET granules, rPET filament yarn, spun yarn, dyed filament and PPSF.
Let's understand the value chain in which the company operates.
Value chain of PET bottle recycling
Used pet bottles collection -> sent bto recycling facilities -> crushing bottles to flakes -> flakes converted into pellets/resins which bare supplied to end user industries
End-user industries -> new bottles, fibre, bags, containers, sheets, film etc
The company mobilizes 425 tones of PET waste every day through their 300+ suppliers. They recycle 16-18% of Indian PET bottle waste and target to reach 25% by 2026.
As we all know there's buzz around clean environment. Plastic decomposes for a long tine time. That creates harmful effects on the overall economy. So, the opportunity is huge. It's a $10 trn global opportunity. If we recycle we can save $200 bn and reduce 25% of GHG by 2040 according to PWC, MacArthur report. And this will create 7 lakhs new jobs during that time.
Let's look at some more numbers.
Global
1. Global PET market to grow from $38 bn in 2022 to $83 bn by 2028 at 13.8% CAGR.
2. Global PET demand growing from 24 mn MT in 2022 to 30 mn MT by 2028 at 3.8% CAGR
India
1. Indian PET market to grow from $3 bn in 2022 to $11 bn by 2028 at 24.8% CAGR
2. Indian PET demand to grow from 1.9 mn MT in 2022 to 4 mn MT
So there are clear tailwinds. The company is also expanding its capacity in Odisha at an amount of 450 cr. They are focusing more on increasing market share in technical textiles and household textile sector along with new high value products across other plastic material types like HDPE, LDPE, PVC. In addition, they are expanding their bottle to bottle recycling which could open a much larger opportunity with superior margins.
New facility at Warangal may generate 500-550 cr topline by FY25 and 750-800 cr in FY26.
Valuation
They have guided 25-30% topline growth over the next couple of years with long term EBITDA margin around 16-17%. Net debt would peak at 500 cr in FY25 or 26. On 18th Jan 2024, they raised money through preferential at ₹1035. Currently the stock is trading around ₹1500.
Current projected revenue could be around 1500-1600 cr. Let's take 1550 cr. Over the next 3 years, they will do around 3027 cr approx with an EBITDA of 484 cr. Assuming net margin at 7%.
Current market cap - 3700 cr, PE - 35 and EV - 4000 cr and EV/EBITDA - 18.43
Projected EV/EBITDA - 8.26, PE - 17.53
So considering the above calculation, the business looks quite cheap. Here, risk to reward ratio is quite high. But remember these are just straightforward calculations. It is not prudent to invest just based on these numbers.
Let me point out some problems as well.
1. They have never given good ROE, ROCE, ROIC over the last few years. However, the stock went up.
2. There's still upward pressure on raw material prices. Management also has guided that 1 or 2 more quarters will be challenging.
3. There's seasonal impact on collection side.
4. Depressed demand in yarn spinning segment.
5. Over capacity in yarn segment.
6. Cheap import of fabric.
Thanks for reading
Take care
Rabi
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.