| Extensive management experience and established track record of operations
The Luthra Group diversified into the waste management and alternate fuel processing business in the year 1999. The hazardous waste management business is operated under the GGG and the business operations are presently managed by Mr. Girish Luthra and his son Mr. Dhruv Luthra. The GGG in total has managed to set up seven operating plants across India with a total capacity of 9,00,000 MT per annum with an average utilisation of 40-45%. Further, the group is setting up two additional plants and capacity enhancement in one of the existing plants. Of the same, one greenfield plant will be used for industrial waste which is already completed and the other one will be used for municipal waste. Additionally, each of the plant consists of alternate fuel processing facilities. The GGG caters to a number of sectors including pharmaceutical, automobile, chemical manufacturing, textile among others, thereby ensuring sectoral divarication. Also, the group has an established clientele and provides waste management services to SRF Limited, Hemani Industries Limited, Gurugram Metropolitan Development, Bharat Rasayan Limited, Gujarat Fluorochemicals Limited, Aarti Industries Limited, etc. About 40 percent of the total income is derived from customers with a strong credit profile. Going forward the revenue contribution from alternate fuel supplied to cement companies is expected to increase owing to the restrictions imposed on cement industry towards coal consumption, presently alternate fuel contributes only ~3 percent to the total revenue.
Acuité believes the favourable operating environment on account of increasing compliance around waste management and disposal, wide presence of the GGG and long track record of operations will strengthen the business risk profile over the medium term.
Augmentation in scale of operations and profitability
The revenue from operations of the group reported growth in operating income to Rs. 387.08 Cr in FY23 (provisional) as against Rs. 311.76 Cr in FY22 reflecting a growth of ~24% during the period. The improvement was majorly on account of higher execution of orders towards waste management. The group initially collects waste from several industries such as pharmaceuticals, textiles, and agro processing, to name a few. The waste is subsequently transported to the Alternate Fuel Resource Facility and the Treatment and Safe Disposal Facility. Also, the group earns majority of its revenue i.e. 97% from collection of the waste from waste generator companies and the rest as tipping fees from the cement companies. The profitability of the group also witnessed an improvement as reflected by improvement in operating profit margin to 37.45% in FY23 (Provisional) compared against 36.70% in FY22. The PAT margins also witnessed improvement to 26.69% in FY23 (Provisional) as against 19.58% in FY22.
Additionally, GGG signs long term contracts with its customers and has minimum volume commitment with annual price escalation clause and periodic revision in transportation cost in line with changing market prices. This ensures revenue visibility over the medium term and mitigates susceptibility of operating margins to changing raw material prices.
Acuité believes that the ability of the company to maintain its scale of operations and improvement in profitabilitywill remain a key monitorable over the medium term.
Healthy financial risk profile with comfortable debt protection metrics
The financial risk profile of the group is healthy marked by high net worth, low gearing, and comfortable debt protection metrics. The tangible net worth of the group stood high at Rs. 455.12 Cr in FY23 (provisional) as compared to Rs. 347.43 Cr in FY22. The improvement in net worth is majorly on account of accretion of reserves. The total debt of the group stood at Rs. 252.40 Cr in FY23 (provisional) as against Rs. 45.60 Cr in FY22. The gearing of the group remained low at 0.55 times in FY23 (provisional) as against 0.13 times in FY22. However, the gearing of the company is expected to deteriorate over the near term on account of additional borrowing availed by the group. The increase in debt levels of the group is majorly on account construction of new greenfield plants and capacity addition of existing units. GGEPIPL had set up 2 plants in Gujarat and Maharashtra. The construction of industrial waste plant has been completed and awaiting consent to operate (CTO) from authorities. The other municipal waste plant is expected to be completed by Sep’ 2023. The TOL/TNW stood at 0.80 times in FY23 (provisional) against 0.40 times in FY22. The debt protection metrics remained comfortable with DSCR at 9.14 times and ISCR at 16.86 times in FY23 (provisional).
Acuité believes that the financial risk profile of GGG is expected to remain healthy on account of steady margins and conservative financial policy.
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| Sizeable investment in group companies
There has been a continuous increase in the advances given by GGG to other group companies of the Luthra Group to support the business operations, diversification and scalability. The total loans and advances stood at Rs. 184.65 Cr as on March 31, 2022 against Rs.127.32 Cr as on March 31, 2021. Going forward, LG intends to further expand its operations, the expansion shall be funded through the cash flows of the GGG. The adjusted debt to equity i.e. after reducing short term loans and advances from equity stood at 0.28 times as on March 31 2022 which is likely to deteriorate over the near term on account of additional borrowing by the group for its expansion plans. Acuité believes, the financial risk profile of GGG over the medium term would remain stable subject to proper cash flow management with group companies.
Strict Government regulations
Waste management industry is subject to strict government regulations laid under the state and central pollution control board. Any change in regulations could negatively affect the industry and the performance of the company. Non-adherence to the same could result into levy of penalties, license cancellation and also plant shutdown.
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