Industry

Lead & Secondary Metals Recycling

1. Industry in One Page

Secondary lead recycling extracts refined metal from spent batteries and scrap rather than from mined ore. India's organised recycling sector processes roughly 1.2 million tonnes of lead per year and is growing at 12–15% annually, pushed by a battery fleet that doubles every 7–8 years, a tightening EPR regulatory framework, and a structural shift of volumes from informal smelters to compliant facilities.

Three facts that frame the entire industry:

1. The spread, not the price, is the product. Recyclers buy scrap at a discount to London Metal Exchange (LME) lead and sell refined metal at near-LME. The gap is the processing spread ($0.19–$0.24/kg of output). Back-to-back MCX hedging locks this spread at purchase — LME moves cancel out before they affect margins.

2. Regulation is the structural moat. Battery Waste Management Rules (2022) require original equipment manufacturers to submit EPR credits to prove battery collection compliance. Only registered formal recyclers generate these credits. The informal sector — ~70% of India's first-mile collection today — cannot comply, forcing OEM scrap flows into formal channels over a 5–7 year regulatory transition.

3. Scale and utilisation drive economics. A plant above 90% utilisation earns 10%+ EBITDA margins. Below 70%, margins collapse to 5–6%. Asset turns of 8–10× (revenue / capital employed) make incremental capacity highly profitable once ramped.

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2. How This Industry Makes Money

The Spread Model: Buying Scrap, Selling Metal

Secondary lead recyclers do not bet on commodity prices. They earn a processing spread — the difference between what they pay for scrap input and what they receive for refined lead and alloys output.

Step	Activity	Economic Logic
1. Source scrap	Buy spent batteries, cable scrap at 60–70% of LME	Scrap price tracks LME; discount is structural
2. Process	Smelt, refine, alloy to customer specification	Fixed-cost-intensive; utilisation determines unit cost
3. Sell refined metal	To automotive OEMs, telecom, UPS at ~LME spot	Selling price also tracks LME
4. Earn spread	Difference = $0.19–$0.24/kg of lead output	Hedged at purchase; insulated from LME direction

MCX hedging is not optional — it is the business model. Gravita buys scrap, simultaneously sells lead futures on MCX (India's commodity exchange), locking in the spread before the smelting cycle begins. If LME moves, both the scrap cost and the futures position adjust equally. The net result: $190–$243/tonne earned regardless of LME direction.

Tolling vs. Outright Purchase

The tolling model is preferred because it eliminates commodity price risk for both parties. The OEM gets a guaranteed scrap disposal channel and EPR compliance credits. Gravita earns a pure processing fee with zero metal price exposure. This is why Gravita's margins are structurally more stable than peers relying on outright purchase.

Revenue Mix and Unit Economics by Segment

Lead is the core (~88% revenue). Aluminium and plastic recycling share the same collection and processing infrastructure, adding revenue at incremental cost. Value-added products — alloys, master alloys, polypropylene recovered from battery casings — now represent ~46% of revenue and carry higher per-tonne spreads than commodity refined lead.

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3. Demand / Supply / Cycle

Demand Drivers: A Battery-Centric Market

Lead demand in India is ~85% from lead-acid batteries. Three sub-segments drive volume growth:

1. Automotive replacement (largest pool): India's vehicle parc of ~300 million units grows 6–8% annually. Every battery is replaced every 3–5 years — generating predictable, recession-resilient replacement demand that is largely independent of new vehicle sales.

2. E-rickshaws (fastest-growing): India's ~10 million e-rickshaws each carry 4–5 batteries totalling 100–130 kg of lead, vs. 8–12 kg for a car battery. Fleet growth at 15–20% annually makes this the most powerful volume driver for the next decade.

3. Stationary / backup power (VRLA): Telecom towers, data centres, and UPS systems use valve-regulated lead-acid batteries with a 3–5 year replacement cycle. India's expanding digital infrastructure underpins steady demand independent of automotive cycles.

Revenue History: One Decade of Compounding

Revenue has compounded at ~24% CAGR over 10 years, driven by volume growth and formalisation rather than LME price inflation. FY2016 saw a dip as LME prices fell (lower revenue pass-through), illustrating the revenue sensitivity to scrap pricing even when margins are hedged.

Supply Side: The Formalisation Shift

India's battery scrap supply chain has three layers:

• First-mile collection (~70% informal): Kabadiwallas and small aggregators collect from garages and households. Price discovery is opaque; GST evasion was historically common.
• Secondary aggregation (rapidly formalising): Regional dealers who sort and pack scrap. GST RCM notification (October 2023) has pushed this layer toward registration.
• Processing/refining (30% organised): Top 10 formal recyclers handle ~30% of throughput; target 60–70% by FY2028 as EPR collection targets escalate.

Why recyclers are less cyclical than miners: LME price changes pass through to both scrap input and refined metal output, largely cancelling out. Volume is driven by battery replacement demand — non-discretionary and non-deferrable. The principal cyclical risks are scrap supply tightening in recessions (fewer vehicles scrapped) and spread compression if competitor capacity additions outpace scrap availability.

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4. Competitive Structure

Market Concentration

India's organised secondary lead market is moderately fragmented. The top 10 formal recyclers control ~25–30% of total throughput. The remaining ~70% flows through approximately 400–500 unorganised smelters, most of which:

• Lack modern emission controls (bag filters, scrubbers)
• Cannot issue EPR credits to OEM clients
• Operated below GST threshold until RCM enforcement began
• Face increasing regulatory risk under BWMR 2022

Gravita's Margin Premium: Structural, Not Cyclical

Gravita earns 8–10% OPM, roughly double POCL's 4–5%. This gap has been persistent across seven years and multiple commodity cycles, indicating it is structural. The sources:

1. Tolling share (85% India): Eliminates commodity price variance from margins; peers at ~40–50% tolling
2. Value-added product mix (~46% revenue): Alloys command 15–25% premium over commodity lead per tonne; polypropylene from battery casings is high-margin
3. Multi-metal cross-selling: Aluminium and plastic recycling share overhead with lead operations; incremental EBITDA flows at near-100% incremental margin
4. International diversification: African scrap typically cheaper than Indian; different scrap economics diversify the spread

Barriers to Entry

• Regulatory approvals: BWMR registration, PCB consent, EPR credit registration — 18–24 months to obtain
• OEM relationships: Long-term tolling contracts with Amara Raja and Exide are sticky; switching involves logistics disruption and EPR compliance risk for the OEM
• Scale economics: Minimum efficient scale ~30,000 MTPA; below this, unit costs are uncompetitive with organised peers
• MCX hedging infrastructure: Real-time position management requires treasury capability small players lack

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5. Regulation / Technology

The Regulatory Engine Driving Formalisation

Battery Waste Management Rules (BWMR) 2022 are the most important structural driver for formal recyclers:

• All battery producers/importers must meet annual collection targets expressed as % of batteries sold 2 years prior
• Targets escalate: 40% in Year 1, rising to 70–90%+ by Year 5–6 of the regulation
• Non-compliant producers pay Environmental Compensation ($0.53/kg or higher) — punitive enough to change procurement decisions
• Collection compliance must be evidenced by EPR credits from CPCB-registered formal recyclers only

What this means for Gravita: OEMs cannot meet BWMR compliance without securing EPR credits from formal recyclers. This creates captive demand — OEM procurement teams are motivated to sign multi-year tolling agreements to lock in credit supply. As targets escalate annually, this captive demand only grows.

GST Reverse Charge Mechanism (RCM) — Notified October 2023

Under RCM, buyers of metal scrap must pay GST directly to the government rather than to the seller, removing the price advantage informal sellers had from GST evasion. Effects:

• Increased the effective cost of sourcing from unregistered aggregators by 18% (GST rate on scrap)
• Channelled an estimated 10–15% of previously informal scrap volumes into formal supply chains in FY2024–FY2025
• Creates a paper trail enabling enforcement of BWMR collection targets

Regulatory Risk to Watch: Any rollback of EPR enforcement (particularly during election cycles) would slow formalisation. Historical pattern in India: environmental regulations strengthen over time but implementation can lag by 1–2 years.

Technology Factors

Rotary furnace yield advantage: Modern short rotary furnaces (Gravita's proprietary design) recover >99% of lead vs. 85–90% for older reverbatory furnaces. At 20,000 MTPA scale, a 10% yield improvement is worth ~$3.2–4.2M/year of additional output at current spreads. This also earns EPR credits faster per tonne of input.

Lithium-ion risk: Overstated for the decade ahead. Li-ion adoption in India is concentrated in 2-wheelers and passenger cars. Lead-acid will retain dominance in:

• E-rickshaws: Lead-acid is ~5× cheaper per kWh for the use-case; replacement economics favour it through 2035
• Automotive start-stop (AGM): AGM lead-acid is cheaper than lithium for engine start; major global OEMs have not committed to change
• Telecom VRLA: Standard for tower backup; lithium substitution is multi-decade given capital cost

Consensus forecast: Lead-acid holds 65–70% of India's battery market by volume through 2035.

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6. Metrics Professionals Watch

The Six Numbers That Matter

ROCE Through the Cycle

ROCE peaked at 32% (FY2023) when existing capacity ran at full utilisation and EBITDA/tonne was at a multi-year high. The decline to 17% (FY2026) reflects ~$159M of new capital being deployed in Mundra (80K MTPA) and Phagi (45K MTPA) plants not yet contributing revenue. This is the expected pattern for a capital-allocation-intensive business in expansion phase. Watch for ROCE recovery toward 22–25% in FY2027–FY2028 as new plants reach 85%+ utilisation.

Working Capital: The Invisible Risk

CCC spiked to 139 days in FY2026 — the highest in the dataset. This is attributable to inventory build for new plant commissioning and extended receivables from overseas subsidiaries scaling rapidly. Normalisation toward 90–100 days as new plants ramp and overseas receivable cycles mature would be a positive signal. CCC above 120 days alongside flat or declining ROCE is the key warning sign — it would imply capital is being tied up without corresponding return.

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7. Where Gravita Fits

Market Position

Gravita is India's largest formal secondary lead recycler by installed capacity (236,559 MTPA lead, targeting 700,000 MTPA by FY2028). It is the only listed multi-metal recycling platform with operations across India and 9 countries internationally.

Competitive Moat: Scale + Regulatory Capture + Mix

OPM Comparison: The Margin Gap

Gravita's ~5–6 percentage point OPM premium over POCL has been consistent across seven years and multiple commodity cycles.

Balance Sheet Transformation

The FY2025 equity jump from $89M to $219M reflects a significant equity issuance (QIP). Combined with strong internal cash generation, this left Gravita effectively net-debt-free by FY2025. FY2026 debt rose to $78M entirely for the Mundra/Phagi expansion. At a debt/equity ratio of 0.30×, the balance sheet has substantial capacity to fund the full $159M capex programme.

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8. What to Watch First

When following Gravita India, prioritise these six signals in order of immediacy:

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Generated by IR Analyst. For the latest data, refer to Gravita India investor relations and NSE disclosures.