Are you aware that India is one of the top recyclers of PET bottle(Normal mineral water bottle) waste? Recycling rate in India is around 80% compared to China at 80-85%, Japan at 75-80%, USA is at just 25-30%. One key player that is catering in this segment is Ganesha Ecosphere ltd. Ganesha Ecosphere ltd converts PET bottle waste to fiber/yarn which is used to make clothing. Basically, Utilizing waste to make something useful. I will explain in further details in the blog “Ganesha Ecosphere Ltd- Analysis”
In the blog, I will cover:
1. Brief about Polyester & PET Bottle recycling industry
2. How Textile Exchange is forcing brands to use more recycled material in their products
3. Key Takeaways from Filatex India Ltd Q2Fy21 Concall
4. About ‘Ganesha Ecosphere Ltd’
5. Recycling value chain
6. How is product pricing done
7. Financial Analysis
8. My take
Now, lets look at how things are on a broader level.
Polyester is the most widely used fiber worldwide & had a market share of around 52 % of the global fiber production in 2018. I am sure all of us would be familiar with the word polyester which is extensively used in making clothing.
Polyester is made from PET(Poly Ethylene Terephthalate) Chips which in turn is made from ethylene glycol and terephthalic acid. Basically all these are crude oil derivatives. The same PET chips are also used to make packaging material, plastic bottles and many more plastic products. Implying it causes similar impact to environment as that of plastic.
The fiber made from raw PET is called ‘Virgin Polyester Staple Fiber(VPSF)’ whereas those made from recycled PET bottle waste are called ‘Recycled Polyester Staple Fiber(RPSF)’
But given the stretchier and resistant nature of product with reasonable pricing , the polyester products market is expected to grow fast, more so in the Sportswear segment. The recycling of these clothes are very difficult because of it being mixed with various materials while manufacturing. On the other hand, the use of PET bottle is going to go up only with the increased consumption of beverages, mineral water, fruit juices as well as the introduction of smaller bottles.
So the best fit solution as of now seem to be use of recycled plastic(PET Bottle waste) in clothing. Recycled PET chips are also called rPET.
Recycling is the most environment friendly alternative for plastic waste disposal.
In 2017, non-profit organization Textile Exchange challenged over 50 textile, apparel and retail companies (including giants like Adidas, H&M, Gap and Ikea) to increase their use of recycled polyester by 25 percent by 2020. It worked.
Also,There is constant pressure on these brands to continue using recycled materials for their products.
Ganesha Ecosphere Ltd(GPL) is the largest PET recycler in the country in terms of production capacity of manufacturers of Recycled Polyester Staple Fiber(RPSF) in India. PET recycling industry which has ~40 organized players, accounting for 85-90% share of the industry.
Recycling industry is growing by 10+%.
Key Pointers- Recycling industry
- Energy needed to make rPET is less than what was needed to make the virgin polyester. Atleast 50% savings in energy cost.
- Producing recycled polyester creates 75% less CO2 emissions than virgin polyester.
- Recycled polyester doesn’t require new petroleum to create, lowering the demand for new petroleum extraction and reducing overall carbon footprint.
- Disposal in water bodies, or in municipal dumps leads to toxic releases due to leaching in land and water entailing into degradation of soil and water quality.
- Competition in the rPET products are primarily on price and to a certain extent on performance, quality & availability.
- Higher capacity utilization helps the company to spread costs thus, thus leading to improved profit margins.
- Company faces competition primarily from unorganized sector.
- Products made from any sort of waste is always inferior in quality to those made from virgin raw materials. For example paper made from paper waste, Fibre made from PET waste will be inferior in quality to the products made from virgin materials.
The product manufactured by GPL is very basic commodity product where the pricing has been on the basis of demand & supply. But things change when the concept of sustainability comes to foray i.e. how the products of the company are getting manufactured.
Excerpts from the 2019 Annual report of 'Textile Exchange'.
Textile Exchange is a non-profit co. incorporated in 2002 and is committed to the responsible expansion of textile sustainability. They are pushing clothing brands to move towards environmental sustainable products. One of the key way is the use of recycled material to be used in new goods.
The market share of recycled polyester as a percentage of total polyester used in fabric increased from around 8 % of the world PET fiber production in 2008 to around 13 percent in 2018. While in 2017 it was 16%.
This decline was the ban on importing different types of solid waste, including plastic bottles and polyester textile waste, to China that came into effect in January 2018.
As a reaction of this ban, prices for recycled polyester have been increasing.
Brands that have signed the commitment as of the Textile Exchange Conference in October 2018 are AB Lindex, Adidas, Aldi-Nord, Bluey Australia Pty Ltd., Aventura Clothing/Sportif USA, Dedicated, Burton Snowboards, Dibella, EILEEN FISHER, Inc., Esprit Europe Services GmbH, Gap Inc., H&M, IKEA, Kathmandu, Skunkfunk, Target, Taylor Home & Fashions Limited, Teva, Timberland, Toad & Company, Volcom Inc., Nike, Inc., West Point Home, Ohmme and Under the Canopy.
The commitment is to increase their use of rPET as a total percentage of fiber used by at least 25 percent by 2020
Takeaways from another listed company called "Filatex's" Concall
Below are paragraphs taken from Q2FY21 concall of Filatex India Ltd transcript. Filatex is into manufacturing of polyester fiber and yarn using ‘Virgin Polyester staple fiber’. They are also in the process of getting into manufacturing of recycled polyester.
There are some interesting notes/points to be taken from these paragraphs.
Even Reliance industries Ltd. last year forayed into fabric made of recycled PET waste.
Ganesha Ecosphere Ltd- Analysis
Founded in 1987 & headquartered in Kanpur, UP, Ganesha Ecosphere Ltd is largest recycling Company of PET bottle scrap in India. It’s capacity is atleast double of its nearest competitor.
GPL commenced commercial production in 1989-90, but it was only in 1995, that the company ventured into manufacturing of Recycled Polyester Staple Fibre(RPSF) from PET bottle waste. It started with a capacity of 6,000 MTPA and the current capacity stands at 1,08,600 MTPA.
Ganesha Ecosphere’s capacity is atleast double of that of its nearest competitor.
Company mobilizes 350T+ of PET waste everyday. GPL has 400+ customers in various segments and 200+ vendors across the country for waste collection.
RPSF is at the lowest end of value chain. The company is moving up the value chain to improve margins. In order to do so, the company is getting its RPSF converted to spun yarn on job work basis from other yarn spinning mills to be asset light as well as improve the margin.
Company has its own RPSF brand called Riviere. This is another step in terms of moving up the value chain.
Company had commissioned a 5 MW solar power to reduce energy cost.
Promoters hold 40.36% stake and they had about 10% of stake pledged because of the borrowing which they got unpledged in FY20.
Although forays by various players into the RPSF space is likely to increase competition but overall it would lead to rerating of the sector. Also, GPL with 25 years of experience should help in maintaining the lead.
According to the management/annual reports there is not much difference in the manufacturing process. But creating waste collection network is the biggest entry barrier for recycled products.
Understanding Recycling value chain
How is product pricing done ?
Product pricing:– The end product of the company is RPSF. The prices of RPSF fluctuate with that of VPSF. Since, the final product being made out of RPSF will be inferior in quality to same product made of VPSF, the prices of RPSF is 15-20% lower than VPSF prices. VPSF Prices are dependent on crude oil & cotton prices.
Raw material pricing:- The raw material for the company is Plastic bottle waste(PET Bottle waste). The pet waste finds application mostly in making RPSF and its prices are determined by demand-supply situation prevailing in the country. Given that the consumption of PET bottle waste is consumed primarily in RPSF manufacturing, companies like Ganesha Ecoshphere gets the power to negotiate the prices since there are very few alternatives to sell these PET waste bottles. Apart from PET bottle waste, co also uses small quantities of of POY waste, off-grade chips, lumps etc.
The raw material sourcing of the Company is primarily being done domestically because of the strong collection network.
The fiber made from raw PET is called ‘Virgin Polyester Staple Fiber(VPSF)’ whereas those made from recycled PET bottle waste are called ‘Recycled Polyester Staple Fiber(RPSF)’.
Ganesha Ecosphere Ltd- Financial Analysis
If you look at the sales number, the sales number grew in FY18 & FY19, on the back of capacity addition at their Bilaspur plant.
The OPM (Operating Profit Margin) have also shown an upward trend over the years.
The company had raised capital via QIP in FY18, which led to increase in Equity Capital(Line item 16). And the company utilized a portion of the proceed to reduce debt because of which the Interest expenses declined from ₹14.57cr to ₹10.49cr between FY18 & FY19.
In terms of profit margin, it has consistently improved between FY15 to FY20.
You can look at the detailed financials here: Link
Ganesha Ecosphere Ltd- Analysis
- Manufacturing of textiles: t-shirts, Body warmers, dress materials etc.
- Functional textiles: Air-filters, car upholstery, carpets etc. Company supplies to Maruti, Mitsubishi, Hyundai, Target Group USA, etc.)
- Filtration & fillings: Pillows, Duvets, Toys etc
Ganesha Ecosphere Ltd- Analysis
Since Ganesha Ecosphere is doing something towards environment sustainability. Here, certifications becomes very important. GPL is OeKo Tex mark certified, which is one of the highest standard in sustainability.
It also has Global Recycle Standard (The Control Union Certification) and ISO 9001:2015 certification.
Ganesha Ecosphere Ltd- My Analysis
If you look at the financials of the company or the end product, there is nothing exciting about the company. The only point that is positive about the global move towards sustainability where its product caters to. As of now, the company is running at full capacity and any new capacity addition takes about 18 months to 2 years. So, the revenue growth can only come from any sort of pricing increase.
Although, the future sounds very promising and it has been talked about for many years. But its better to keep tracking and wait till there is some pricing power with the company.
In terms of valuation, the company is reasonably prices at a Market capitalization of ₹948cr and an PE ratio of 25 as on 08 Jan 2021.