“Implementation of EPR regulations and the shift toward value addition will drive sustained earnings growth.”

About the Company

GEL commenced production in 1988 with the texturizing and dyeing of polyester filament yarn at its manufacturing unit in Kanpur (Uttar Pradesh), with an installed capacity of 391 million tonnes per annum (MTPA). In FY1995, GEL diversified into manufacturing recycled polyester staple fiber (RPSF) from polyethylene terephthalate (PET) bottle waste, with an initial capacity of 6,000 MTPA in Kanpur.

Over the years, the company has expanded its texturizing and RPSF manufacturing capacities and has also forward integrated into the manufacturing of spun yarn from RPSF. As of June 30, 2024, GEL had a total installed manufacturing capacity of 3,000 MTPA of texturized yarn in Kanpur, 96,600 MTPA of RPSF in Kanpur, Bilaspur (Uttar Pradesh), and Rudrapur (Uttarakhand), and 7,200 MTPA of spun yarn (25,920 spindles) at Bilaspur. GEL has the largest capacity for manufacturing RPSF in the domestic market.

Investment Rationale:

• The company is strategically transitioning into value-added products, making a strong competitive moat in the business
• The company is the market leader with a strong focus on both backward and forward integration to drive significant margin
• Strong growth prospects with a very large addressable market, where the demand would increase with the effectiveness of EPR Regulations

Business Segments:

Fibers

In this segment, the company produces two products which are RPSF and PPSF (Recycled Polyester Staple Fiber & Polypropylene Staple Fiber), this segment are age-old segment for the company where the company has a current capacity of 109,000 MT for the company where the end segment are textiles and home furnishing, nearly contributing 65% of the overall revenue of the firm in FY24

Yarn

In this segment, the company has yarn where they have earlier recycled yarn made from the fibers now with recycled PET the company has also been looking for Filament yarn & RSPY (Recycled Polyester Spun Yarn) the company has a total capacity in the segment of over 23,000 MT in Capacity including both. These segments where the end-customers are from the clothing industry, these segment contributes 25% of the overall revenue of the firm in FY24

Granulets/Pellets Flakes

Granules and Pellets Flakes is the nontechnical area where the company has a strong margin expansion where the capacity is less than the current capacity at Warangal with the Odisha Expansion where the current capacity is in Warangal where the capacity is around 42,000 MT and with the Odisha expansion of over 45,000 MT with the total coming to 87,000 MT where these products are used in Food & Beverage, FMCG & High-End Textiles. The segment contributes around 10% of the revenue in FY24.

Geographical Classification

The majority of the Income comes from India which contributes 91% of the total revenue in FY24, Exports contribute 9% of the overall revenue in FY24.

Management

• The company’s management is led by Mr. Shyam Sundar Sharma (Chairman & MD) who has nearly 60 years in the industry, serving key positions in big conglomerates such as Aditya Birla Group and so on.
• The company is also managed by their two sons Mr. Sharad and Rajesh Sharma
• The promoter currently has a 35.86% stake in the business, which is quite low considering the size of the business, the company has recently in FY23 has diluted its stake from 42% to around 36% to raise QIP (Qualified Institutional Placement), where they have raised from marquee investors, which needs to be further monitored
• The board has very extensive experience in Finance, Private Equity, Consulting and Professionals from the Ex-Director from the Pollution Control Board ensures the company is able to strategically make financial & operational decision for the company

Deep-Dive on the Investment Rationale

The company is strategically transitioning into value-added products, making a strong competitive moat in the business

The company is strategically transitioning into value-added products, such as rPET, along with rPET granules and flakes in the recycling segment. This move enhances the company’s competitive advantage, supported by a robust supplier network spanning over 300 suppliers across the country, built on decades of strong relationships. This diversified supply chain ensures minimal dependency on any single supplier for raw materials.

With extensive experience in the industry, the company is in a pivotal phase of transformation. As part of its strategic transition toward becoming a global leader in the recycling market, it is focusing on expanding and enhancing its portfolio of value-added products.

The company enjoys a first-mover advantage in this segment, supported by marquee clients such as PepsiCo, Coca-Cola, and other major bottlers. These partnerships underscore the company’s ability to deliver consistently high-quality products, further cementing its reputation and market position.

The company is the market leader with a strong focus on both backward and forward integration to drive significant margin

The company is currently the market leader in the rPET and recycling segment, commanding a market share of over 50%. With its first-mover advantage, the company has excelled in product innovation and established strategic partnerships. Notably, it has acquired a 2% stake in Eco Recycling, enhancing its position in the recycling ecosystem. Additionally, the company has collaborated with Manjushree Technopack Ltd. to source raw materials and co-develop packaging solutions aimed at reducing dependency on virgin plastics while promoting the effective use of recycled plastics across the country.

The company’s strategic focus on increasing its value-added offerings, such as granules and flakes, is a significant shift from the cyclicality of its yarns and fibers segment. This transition is expected to mitigate the volatility associated with its traditional business model. Currently, the rPET and recycling segment contributes 10–15% of the overall revenue, with substantial growth anticipated following the commissioning of new capex in Odisha.

This expansion is projected to significantly boost the segment’s contribution to revenue and improve the company’s margins from the current 13–14% to 15–17% on a blended basis, marking a critical step forward in its sustainability-focused growth strategy.

Strong growth prospects with a very large addressable market, where the demand would increase with the effectiveness of EPR Regulations

The company has strong growth prospects and a strong addressable where the current market size of the opportunity is over US$ 2bllion with a strong growth in the industry where the market size is set to grow 25% CAGR in the next 6 years and with the PET demand going to increase to 4 Mn MT of PET where the company currently hold the highest capacity of over 198,000 MT of capacity with the increase of capacity would lead to 200,000+ Capacity in the segment. Those with a strong regulatory tailwind of EPR where starting from April 2025, companies need to increase nearly 30% of plastic packing should be using recycled plastics for companies and by 2029 it’s expected to increase to 60% this would accelerate the pace of the growth due to increase of demand due to the regulatory constraints.

Risk/Threats

Higher Working Capital Days:  

The company has very high inventory and trade receivables required where the inventory days for this business are over 150 days, hence it’s crucial the company needs to extensively invest in their working capital to have a sustainable operation for the business, even with the new capex the company is looking to do in Odisha where the capex is over 450 crores in which additional 100 crores is required to invest in working capital, the company overall is both working capital and fixed capital intensive primarily to ensure they are able to scale strongly and able to serve the market, but if there is a slowdown in demand that would impact the return for the business.

Increasing Competitive Intensity: The company has very high competition with over 30-35 players in the market, and players are strongly focused on increasing capacity where as well domestically and globally where multiple players are entering into this space the company needs to strongly invest in R&D to ensure the company is strongly able to be a competitive edge as being the market leader.

Raw Material Volatility & Risk of Substitutes:

The major risk the company also faces is the risk of substitutes where the company’s direct replacement for the recycled fiber is the virgin fiber where the realization is derived from the crude oil prices if these fluctuate this could directly impact both their demand as well as their raw material as these PET bottles would be higher in case of higher prices of virgin fiber, another issue is that generally virgin fiber is cheaper than Rpet, currently due to more regulatory constraints there has been a higher requirement for recycled products used for manufacturing, hence any changes in regulation or changes in crude prices has a direct impact for the business.

Valuation

As of January 13th, the market values the company at a market capitalization of ₹4,108 crores, with a P/E ratio of 48.9x earnings and an EV/EBITDA of 21.8x, indicating that the stock appears expensive at first glance. However, considering the anticipated growth in the coming years, the company’s forward PEG ratio of less than 0.5 suggests an attractive valuation relative to its strong expected EPS growth over the next 3–4 years. This makes the current valuation compelling for long-term investors.

The company’s transition into value-added products, such as filament and rPET fibers, aligns with the increasing adoption of recycled materials by global clothing brands. The shift is further supported by the enforcement of Extended Producer Responsibility (EPR) regulations, which serve as a robust growth catalyst for the recycling segment.

With strong demand drivers in place, the company has strengthened its position through strategic initiatives, including acquiring a stake in Race Eco Recycling Ltd. and plans to add a wash line to enhance value capture across the segment. These efforts position the company to be present across the entire value chain. Additionally, its significant capex investment in Odisha, featuring world-class machinery, underscores its commitment to growth in the granules segment.

Investors should remain cautious of potential headwinds that could impact the company’s growth trajectory. A key concern is the company’s dependency on virgin plastics, as revenue remains partly tied to price fluctuations in this segment. Additionally, delays in the implementation of Extended Producer Responsibility (EPR) regulations could postpone the anticipated growth catalysts. 

Furthermore, the intense competition within the industry poses a risk of margin compression, making it essential for the company to differentiate itself. To address these challenges and maintain its competitive edge, the company must prioritize investments in research and development (R&D) and focus on innovation to stay ahead of industry trends and competitors.