Tega Industries IPO opens tomorrow: Should you subscribe?

Tega Industries Limited (Tega) IPO opens for subscription on 1st December. The company is looking to raise up to Rs 619 crore through the public issue. Here are the details:

About the IPO

Tega Industries Limited IPO Date: 1 December - 3 December 2021

Tega Industries Limited IPO Price band: Rs 443 - Rs 453 

Issue Size: Rs 619 crore (Offer for sale of up to 13,669,478 Equity shares)

Post Issue Market Cap: Rs 2,937 crore – Rs 3,003 crore

Reservation: QIB 50%, Retail - 35%, NII 15%

Minimum Investment:  Rs 14,949

Bid lot: 33 shares, and in multiples of 33 shares

Objectives of the issue

The net proceeds from the IPO will be utilized for the following purposes :

• to achieve the benefits of listing the equity shares on the stock exchanges

About Tega Industries

• The company was established in 1976. It is a leading manufacturer and distributor of specialized, critical, and recurring consumable products for the global mineral beneficiation, mining, and bulk solids handling industry.
• On the world stage, Tega Industries is the second-largest producer of polymer-based mill liners, based on revenues for the year 2020.
• The company's product portfolio comprises more than 55 mineral processing and material handling products.
• Tega has six manufacturing sites - 3 in India, at Dahej in Gujarat, and Samali and Kalyani in West Bengal, and three sites in major mining hubs of Chile, South Africa, and Australia. 
• They have a joint venture in India with the UK branch of Hosch Group, Germany, and are engaged in precision conveyor belt cleaning and caters to various industries in India.
• The company has 18 global and 14 domestic sales offices located close to its key customers and mining sites.
• The company plans to expand its operations in major markets including North America, South America, Australia, and South Africa.

Tega Industries: Products

Tega's product portfolio includes consumables required in the mines and mineral processing industry. Some of the products are as below:

Mill liners - Mill liners are used in the grinding mills for the beneficiation of minerals. Growth drivers for the mill liners business include a new opportunity in relation to the replacement of mill liners in the semi-autogenous grinding mills.

Trommels and Screens - Screens and trommels are used for the separation of particles according to size. The key products for the screens and trommels business include Rapido and Trommels.

Hydrocyclones - Hydrocyclones are used for extracting or separating slurry particles, based on the overall particle weight while consuming relatively lower power. The key product is the Tega Cyclone.

Conveyor Products - The conveyor products include conveyor components used with conveyor belts. The key conveyor products include the Spill-ex skirt sealing system, Centrax, etc.

Tega Industries: Peers

Tega operates in a sophisticated industry characterized by the strong presence of multinational companies. Given the variety of products and services the company offers, it has limited competition globally. 

However, they face competition from international and domestic players that come from both organized and unorganized segments. In terms of listed peers, there is only one name - AIA Engineering Ltd.

• The AIA has a total revenue of Rs 3,053 crore compared to Rs 856.68 crore revenue posted by Tega in FY21.
• Earning Per Share (EPS) is much higher for AIA compared to Tega.

Tega Industries: Financials

• Tega is earning 26.8% of the revenues from new customers and 74.2% from recurring customers which is a good ratio to maintain.
• Tega has posted a good CAGR of 12.75% in revenue for the last three financial years. 
• Tega Industries had posted Rs 11.8 cr net profit on revenue from operations of Rs 173.2 cr in Q1 FY22. This net profit ratio is far below what was achieved by them in the previous fiscals. However this can be attributed to nationwide lockdowns due to the second wave of Covid.
• The revenue from operations outside India was Rs 696.12 crore, Rs 588.45 crore, and Rs 543.93 crore in FY21, FY20, and FY19, respectively, amounting to 86.42%, 85.92%, and 85.83% of its revenue from operations in the respective Fiscals.
• The company operated with 59.80%, 60.02%, and 59.39% material margins and 27.86%, 16.85%, and 16.49% EBITDA margins for FY21, FY20 and FY19, respectively.

Tega Industries: USPs

Leading producers of products that have high barriers to replacement - Mineral processing sites do not tend to switch to a substitute supplier, even if the product offered by a new entrant or established substitute supplier is comparatively cheaper. It is due to the high cost of initial planning involved, the lead time required for approval, the degree of certainty of the products of an established supplier, etc.

Recurring revenues - The products Tega manufactures cater to the after-market spending of a mining processing unit. As a result, they are insulated from mining Capex cycles. For example, despite some volatility in capital expenditure cycles for gold and copper mining sites, their business was not impacted.

Technology intensive and high value add products - The company has an in-house R&D and manufacturing capabilities that allow them to turn around customized designs in a shorter time frame. They have a track record of developing and commercializing a diverse and innovative product portfolio of 55 mineral processing and material handling products over the years.

Marquee global customer base - Tega has a track record of servicing leading global mining companies for a long period of time. In several cases, their relationships with key customers span more than ten years, leading to high repeat revenues.

Tega Industries: Growth Potential

Target high growth markets - The company plans to capitalize on its track record of adding new customers and mining sites across geographies. Tega's client acquisition period has significantly reduced in new markets, especially in the USA, Chile, Peru, and Mexico. They plan to leverage their insights from these market entries to continue their expansion into other markets.

Leverage in-house R&D to come with new products - The company will continue to expand its R&D capability to capture future growth trends. They will also continue to focus on their ability to customize their product offerings according to the specific requirements of their customers through innovation and focusing on sustainable solutions.

Inorganic growth - Tega plans to continue to actively pursue acquisitive opportunities and strategic alliances with targets that are complementary to their business. They will leverage their free cash flows to selectively evaluate complementary targets for strategic acquisitions, and continue exploring synergies that may arise from strategic alliances, partnerships, or initiatives.

Tega Industries: Risks

Risk of doing business in foreign countries - In the last three financial years, 85% (average) of its revenue comes from outside India. The company faces risks that include compliance rule change with a variety of local laws and regulations. Also, changes in local laws, regulations, or policies, including restrictions on trade, unfavorable labor regulations, tax policies or economic sanctions, etc. If the company is unable to effectively manage its international manufacturing and other operations and related risks, it may severely impact its revenue.

Dependence on third-party logistics - The company is dependent on third-party logistics and support service providers for the delivery of raw material and finished products. Any disruption in their services (like transportation services or decrease in quality of service) will impact Tega's business and lead to lower revenue and profits.

Shortfall or delay of raw material - Tega's business depends on its ability to attract and retain third-party suppliers of raw material. Raw material supply and pricing can be volatile due to a number of factors beyond its control, including the ability of suppliers to manufacture such raw material. Any significant increase in raw material costs could result in an increase in its total expenses, which may in turn adversely impact its financial condition and results of operations.

Tega Industries IPO: INDmoney Analysis

Tega Industries has reported a healthy 13% rise in its topline from FY19- FY21, backed by steady demand. During the same period, the company’s bottom line has grown by more than 4 times from Rs 33 cr in FY19 to Rs 136 cr in FY21. Covid-19 had limited impact on the mining industry, as it was declared as an essential service in all countries globally.

At the higher end of the price band, Tega Industries is priced reasonably at a PE ratio of ~22 times FY21 earnings per share. This is cheaper as compared to listed peer AIA Engineering (PE ratio of 32 times). Tega Industries has reported better return ratios as compared to AIA Engineering.  

Given the company’s healthy topline growth, leadership position, robust return ratios, strong R&D, healthy margins, marquee global customers and reasonable valuations, we remain “positive” on the prospects of this issue.