Tega Industries Ltd

Dynaprime to act as key growth driver for Tega Industries

Company Profile

Tega Industries Ltd (TEGA) is the fifth largest manufacturer globally in the mill liners market in an oligopolisticmarket (top 5 players control ~50% market share), and distributor of specialized ‘critical to operate’ and recurring consumable products which mainly caters to global mineral beneficiation, mining and bulk solids handling industry. Tega offers comprehensive solutions to marquee global clients in the mineral beneficiation, mining and bulk solids handling industry, through their wide product portfolio of specialized abrasion and wear-resistant rubber, polyurethane, steel and ceramic based lining components, used by their customers across different stages of mining and mineral processing, screening, grinding and material handling, including after-market spends on wear, spare parts, grinding media and power, which are regular operating expenses for their customers. It started its operation in India in 1978 in collaboration with Skega AB, Sweden. It has 10 manufacturing facilities of which 7 are in India and 3 are in abroad (Chile, South Africa, and Australia).

Leading player in mill liner industry which has high barriers to entry.

Tega is fifth largest manufacturer globally & second largest producer of polymer-based mill liners by revenues and is a leading manufacturer and distributor ofspecialised critical to operate and recurring consumable products for the global mineralbeneficiation, mining, and bulk solid handling industry. The company operates in an industry whichhas high barriers to industry. Mineral processing companies generally does not switch from one supplier toanother for procurement of mill liners due to high cost of initial planning, longer lead time required forproduct approvals, high cost of downtime for gold & copper miner company as compared to cost ofconsumable. Tega has established long standing relationship with its clients, supplying to top 20 miningcompanies in both gold and copper segment. Company gets ~75% of its revenue from repeat businessdemonstrating high level of customer loyalty and satisfaction.In FY23 mill liner business, accounted for ~75% of the revenues, grew by ~21% YoYwhile the non-mill liner business experienced even higher growth of ~26% YoY andthe overall business expanded by ~28% YoY.

Constant innovation and huge scope for Dynaprime.

In 2018 Tega launched Dynaprime, its disruptive steellining product. The composite liner is pitched as a suitable replacement for conventional steel liner markedby distinctive advantages in terms of overall cost, endurance, and price value proposition. Tega is focussedon a vast $900 mn addressable market with very limited competition. In FY23 sales from Dynaprime rangeaccounted for ~25% of revenue, management expect the growth rate in sales to be ~25%-30% over nextfive years with an objective to increase its revenue share to ~50% by 2027.

Advantage of Dynaprime:

1) Dynaprime offers cost saving for the customer as it has ~50% more life ascompared to traditional steel linings.

2) Time taken to install Dynaprime product is lesser compared to steel liners asnumber of parts are lesser compared to steel liners which helps to reducedowntime and customers save on downtime expenditure.

3) Since Dynaprime has rubber and steel, so it has less steel scrap which makes itsattractive for the customers from ESG perspective.

4) Dynaprime helps to reduce power cost as bucket sizes is larger compared to steel,so it can lift more materials, hence help in the reduction of power cost.

Capacity expansion to drive growth.

Company plans to spend total capex of ~$30 mn in Chile and otherplants by 2025 to enhance manufacturing capacity of which ~$20 mn will be spent on a greenfield expansionin Chile which will be funded with a combination of debt and internal accruals. Chile plant is expected tostart commercial production by Q1FY26 and expect to fully utilise the expanded capacity by FY30. Expect toachieve a revenue of ~$75-80 mn at peak utilisation from Chile.

High value add and technology intensive products, backed by strong R&D

Company’s in-house R&D and manufacturing capabilities, including design, process engineering and manufacturing facilities, allow them to turn around customized designs in a short time frame, offer comprehensive solutions and better service standards and cross sell multiple products to their customers.

The company design and customize their products uniquely for each customer site, considering multiple characteristics of the application including type of ore, ore size, tonnage, breakage rate, power or rotational speed, pH, temperature, humidity, size, distribution and trajectory, sound levels, health, and safety standards. Their continuous design innovation makes their products highly engineered “built-to-suit” rather than “off-the-shelf”, with their products being unique for each customer site considering multiple characteristics of its application. 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, including DynaPrime launched by them in 2018.

Long standing market player with marquee global customer base

Tega commenced operations with a foreign collaboration with Skega AB, Sweden in 1978. Over time, they have diversified their capabilities by expanding their product portfolio and augmenting their technical capabilities. Starting from one manufacturing facility in 1978, they have now grown to operate 6 manufacturing facilities across the globe. Tega has a track-record of servicing leading global mining companies for a long period of time and in several cases, their relationships with key customers span more than 10 years, leading to high repeat revenues for them.

Company’s extensive footprint across key mining belts worldwide has allowed them to enjoy economies of scale and logistical advantages and develop significant insight into their customers’ needs and market trends. Their sales and distribution network is also in-house, with 18 overseas and 14 domestic sales offices strategically located in all the key geographies close to key customers.

Q2FY24 Financial Performance

Tega Industries posted healthy earnings growth for the quarter ended Q2FY24. Consolidated Operating revenues grew 37% YoY to Rs.377 cr as against Rs.276 cr in the same quarter of corresponding fiscal driven by consumables segment. On the operating front, consolidated EBITDA witnessed a growth of 51% YoY to Rs.82 cr despite higher raw material costs. EBITDA Margins expanded 200 bps at 21.6% driven by higher gross profit and gross margins. PAT surged 34% YoY to Rs.47 cr aided by healthy topline growth and better than expected operational performance.

Key Conference call takeaways

Tega maintained its outlook of 15% revenue CAGR acrossboth the consumables and equipment segments.

Within this the Dynaprime range is expected to maintain 25% CAGR andother products are likely to grow at slower pace. The implied ask rate for H2 at 20% YoY for consumables is high but can beachieved with incremental revenue from customer additions especially with addition of Rs.1.2 pa revenue from new 5-yearservice contract wef Jan-24.

Tega at a group level has a strong order book of Rs.600 cr as of September 30, 2023.

Key Risks & Concerns

Volatility in raw material prices

Any significantvolatility in raw material prices ofavailability/sourcing related challenge may have an adverse impact on the financial performance of the business.

Volatility in currency/exchange rates

Company is exposed to foreign exchange rate fluctuations. Any significantvolatility in exchange rates may have an adverse impact on the business of the company.

Any significant disruption in logistics

Company imports significant amount of raw material and exports its products to manycountries.Any significant disruption in services provided by these logisticpartners may affect business of the company.

Outlook & Valuation

We believe Tega is well positioned to outpace industry growth due to 1) diversified product portfolio coupledwith introduction of new products - Dynaprime liners opening opportunities in global steel mill liner market(ex-China) currently stands at US$900mn (Tega’s market share is ~5%) for conversion, 2) strong relationshipswith customers (>10 years) with sticky customer base as ~75% sales comes from repeat orders, 3) de-riskedbusiness model due to low customer concentration (top 10 customers: ~25-30% of sales) and diversemanufacturing base (India, Chile, South Africa, and Australia) 4) cross selling of products and capacityexpansion. In Aug 2023 company won an order of ~Rs 6.85 bn from the largest copper mine in Europe.

At CMP of Rs.1140, the stock is trading at 28.5x FY25E which appears reasonable and hence, we recommend BUY rating on the stock.