Investment Analysis: GEM Enviro Management Limited
About Us
GEM Enviro Management Limited (“GEM”), established in 2013, specializes in the collection and recycling of all kinds of packaging waste, including plastic waste. Over the years, the company has diversified its services to include the implementation of Plastic Extended Producer Responsibility (EPR) Programs for various organizations. This has become the company’s largest business vertical, contributing 82.41% of the revenue in the fiscal year 2022-2023. Collection and recycling of industrial plastic waste contributed 17.42% of the revenue, while sales and marketing of recycled products contributed 0.18% of the revenue during the same period.
According to the management, GEM is debt-free, operating on an asset-light business model, and is an emerging leader in the PWM segment. The company holds a market share of around 21-25% among unlisted peers and is the most preferred service provider for over 200 renowned industry players.
Services Provided
- EPR consultancy and fulfillment for Plastic Waste
- Collection and recycling of Industrial Plastic Waste
- Sales and Marketing of recycled products
- ESG Consulting and BRSR (Business Responsibility and Sustainability Reporting)
Understanding Extended Producer Responsibility (EPR)
Extended Producer Responsibility (EPR) was introduced into the Plastic Waste Management Rules in 2016. EPR mandates producers to manage the disposal of their products once consumers deem them no longer useful. Producers must facilitate a reverse collection mechanism and recycling of post-consumer waste equivalent to the amount they produce.
The EPR target is calculated based on the average amount of plastic a producer has placed on the market in the last two consecutive years. EPR is brand-neutral, allowing producers to collect and recycle plastic from any brand to meet their targets.
The 2022 EPR notification requires polluters to fulfill their EPR targets only for the specific category of plastic they release into the market. Additionally, a plastic credit system has been introduced, allowing polluters to sell excess recycled plastic credits to others who need to meet their EPR mandates.
GEM Enviro acts as a Producer Responsibility Organisation (PRO), helping producers meet their EPR obligations by managing the logistics and documentation required for compliance reporting. They play a crucial role in the ecosystem by providing collection, recycling, and compliance services, thereby contributing to a sustainable environment.
How are EPR credits generated?
Financial Performance
In the fiscal year ending March 31, 2023, GEM Enviro Management Limited saw a revenue increase of 30.05% and a profit after tax (PAT) rise of 34.43% compared to the previous year.
Promoter Group and Management
The majority ownership of GEM is held by Dinesh Pareekh and his family, who are also promoters of BLP Equity Research. The management team is professional, with Mr. Sachin (Founder and CEO) and several other members being alumni of IIM Calcutta.
Growth Prospects
-
GEM is expanding its existing EPR credits business and entering new areas such as E-waste and tyre recycling.
-
If an existing client grows 15-20% then they can also grow their volume by the same 15-20%
-
The company aims to target an additional 1000 customers to serve their plastic waste management needs.
-
As the economy grows, more companies will fall under EPR mandates, expanding GEM’s potential customer base.
-
The company is also venturing into the international plastic credits business.
Reason for long Working Capital cycle
GEM has 51 employees on its payroll. The company’s long working capital cycle is due to the extensive documentation required for compliance, leading to delays in payment approvals. As the EPR concept becomes more common, approval times are expected to decrease. For FY 2023, GEM had receivables worth ₹24 crore.
From RHP:
Due to strict documentation and compliance requirements, Debtors’ level is very high in our business. The holding levels of trade receivables were 184 days, 201 days, 185 days and 258 days for FY 2020-21, 2021- 22, FY 2022-23 and the period ended December 31, 2023, respectively. The debtors’ level again rose to 258 days by 31st December 2023 due to the digitization of the issuance process of EPR credits by CPCB, which is yet to stabilise so customers are holding the payments. We, however, expect that debtors’ level will normalize in the current FY so our Company considers the holding levels to be of 210 days for FY 2024-25.
Reasons for Investing
- Excellent PAT margins, sales growth, ROE, and ROCE
- Asset-light business model oriented as a service-based company
- Professional management team
- High growth potential by expanding into other verticals like E-waste and tyre recycling
- Minimal capex required for expansion
- The huge and rapidly growing EPR market size offers growth potential.
Risks
- Frequent changes in government regulations can introduce complexity and cost.
- Potential offer for sale (OFS) by existing promoters.
- Long working capital cycle, expected to improve in the next two years.
- High trade receivables.
- Rent paid to Dinesh and Sangeeta Parekh as the registered office is located on their property.
- Top 5 customers contribute to 40% of the revenue.
GEM Enviro Management Limited presents a promising investment opportunity due to its strong market position, professional management, and high growth potential in the EPR segment. However, investors should consider the risks associated with regulatory changes and the company’s high trade receivables.
Valuations: At the upper price band of 75 the company, will have a P/E of 15.
Disclosure: The Company is going to list on 26 June
Sources:
Management Interview:
