Stock Fundamentals

Should you subscribe to the Tega Industries IPO?

Satya Sontanam | | Updated on: Dec 02, 2021
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The company offers solutions to global clients in the mineral beneficiation, mining and bulk solids handling industry, through their wide product portfolio

The ₹619-crore IPO of Tega Industries (price band at ₹443-453 a share), a manufacturer and distributor of specialised ‘critical to operate’ and recurring consumable products, will close on December 3. The issue is entirely an offer for sale (OFS) with promoters selling 39,77,588 equity shares while 96,91,890 equity shares will be offloaded by investor selling shareholder, Wagner Limited. Post-IPO,the promoter shareholding will come down to 79.17 percent from 85.17 per cent.

The company offers solutions to global clients in the mineral beneficiation, mining and bulk solids handling industry, through their wide product portfolio. High entry barrier for a replacement of these products due to factors such as product innovation and high quality standards, wide customer base and business from lucrative copper and gold mining industry are positives for the company. Scope for higher utilisation of existing capacity and plans to expand manufacturing capacities at strategic locations will give the company a leg-up to its earnings provided favourable conditions are in place.

At the higher end of the price band, the company is valued 22 times its FY21 earnings. While there is no strict comparable peer for the company, PE of AIA Engineering, providing critical components to users in cement, mining and thermal power generation industries, stands at more than 30 times its FY21 earnings, likely due to higher EBITDA margins and wide exposure to various industries.

Business

Tega Industries makes products such as mill liners, hydrocyclones, trommels and screens mineral processing equipment that are critical to the overall productivity of a mineral processing site. Their products include consumables which constitute repeat business from existing mineral processing sites. This accounted for almost 75 per cent of revenue from operations for the company in FY21. The company is confident of retaining customers and add new customers by focusing on reduction of cost per tonne of processing and downtime cost.

The company has six manufacturing sites, including three in India, at Dahej in Gujarat and at Samali and Kalyani in West Bengal, and three sites in major mining hubs of Chile, South Africa and Australia with an installed capacity of 24,558 metric tonne. For FY 21, the capacity utilisation was 58 per cent, leaving room for higher production going ahead.

Significant portion of the revenue for the company is generated from outside India (86 per cent in FY21). Revenue from operation from outside India include North America (13.7%), South America (24.7%), EMER (Europe, Middle East and Russia) (15.49%), Africa (22.62%), and Asia Pacific (9.85%). More than 50 per cent of the revenue for the company comes from users of gold and copper beneficiation and the business is dependent on the operations in this industry.

The company also has a wide customer base with 212 mining sites for Q1FY22 with top 10 customers accounting for about 30 per cent of the revenue.

Current expansion plans include expanding existing capacity at Dahej and Samali facilities in India and to set up a new manufacturing facility in Chile.

Financials

Covid-19 had limited impact on the mining industry, since it was declared as an essential service in all countries globally. Since Tega Industries supplies consumable products for the mines that are required in operations of mines, the company was largely unaffected.

In fact, during the last fiscal, demand for larger-sized equipment i n the mill lining industry improved by good 17 per cent due to fall in ore grade across gold and copper mining locations.

Between FY19 and FY21, total revenue grew at a CAGR of almost 13 per cent to Rs 805 crore with improved operating profit margin at 27.8 per cent in FY21 from 16.5 per cent in FY19. Consequently, net profit zoomed from Rs 32 crore in FY19 to Rs 136 crore in FY21. However, higher margins in FY21 FY21 seems to be an one-off as operating profit margins are back to 16.5 per cent in the three-month period ending on June 30, 2021.

The company's net debt-to-equity ratio stood comfortable at 0.29 as on June 30, 2021.

While the company’s fundamentals look good, there is lack of clarity on how earnings will fare across longer time horizon on the back of cyclical nature of the business. Despite high barrier, there seems to be a competition for the products in both domestic and international market and from organized as well as unorganized players. Though the issue has been subscribed 13.8 times as on December 02, those still sitting on the fence can skip the offer and monitor how the company performs over the next few quarters before taking exposure to the stock. By then, more information about the company related to quarterly performance and its resilience to withstand volatility in commodities’ cycle will be available.

Published on December 02, 2021

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