Tega Industries

Producer of specialized mine products

High entry barrier in a non-cyclical, high growth industry segment will sustain margins and growth

Established in 1976, Tega Industries is a leading manufacturer and distributor of specialized ‘critical to operate’ and recurring consumable products for the global mineral beneficiation, mining and bulk solids handling industry. Globally, it is the second largest producers of polymer-based mill liners based on revenues as of June 30, 2021.

The company mineral processing and material handling products offering covers a wide range of solutions in the mining equipment, aggregates equipment and the mineral consumables industry

The company commenced its operations in 1978 in India, with a foreign collobaration with Skega AB, Sweden. Madan Mohan Mohanka acquired the entire equity stake of Skega AB in Tega Industries in 2001. In 2011, it received funding from Wagner Ltd., an entity affiliated with TA Associates, a global private equity firm.

The promoters of the company are, Madan Mohan Mohanka, Manju Mohanka, Manish Mohanka, Mehul Mohanka and NFSPL (Nihal Fiscal Services Private Limited). NFSPL is an NBFC (Non-Banking Finance company) (without accepting public deposits) primarily engaged in carrying on the business of activities auxiliary to financial intermediation. The promoters of NFSPL are Madan Mohan Mohanka, Manju Mohanka, Manish Mohanka and Marudhar Food & Credit Limited. NFSPL has filed the scheme before the NCLT (National Company Law Tribunal) for, among others, a proposed amalgamation with Marudhar, a member of promoter Group.

The company product portfolio comprises more than 55 mineral processing and material handling products. As an average of the last three fiscals i.e., 2021, 2020 and 2019, sale of products constitutes 95.08% of total revenue from operations, while sale of services and other operating revenue constitutes 2.15% and 2.77%, respectively, of revenue from operations. For the three months period ended June 30, 2021, the sale of products constitutes 94.56% of revenue from operations, while the sale of services and other operating revenue constitutes 3.33% and 2.11%, respectively, of revenue from operations.

The company products offering include consumables required in the mines and mineral processing industry. In the sequence of their usage in the mineral processing value chain, after blasting to floatation, its products include chutes and its liners, grinding mill liners, trommels and screens, hydrocyclones, pumps and flotation parts and conveyor products. The company product range is engineered with a combination of mineral processing engineering, mechanical engineering, and material sciences, while utilizing its expertise in tribology.

The company offer comprehensive solutions to marquee global clients in the mineral beneficiation, mining and bulk solids handling industry, through its wide product portfolio of specialized abrasion and wear-resistant rubber, polyurethane, steel and ceramic based lining components, used by 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 customers.

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 a total built-up area of 74,255 Sq. mts. Its facility in India caters to the domestic and overseas markets across mineral processing and materials handling industries, while its facilities in Chile, South Africa and Australia caters to their respective local and regional mineral processing and materials handling industries. Additionally, its joint venture in India with U.K. branch of Hosch Group, Germany is engaged in precision conveyer belt cleaning and caters to various industries in India. It also has 18 global and 14 domestic sales offices located close to its key customers and mining sites.

To expand its operations globally, the company acquired Tega Industries Africa (Pty) Ltd. (formerly, Beruc Equipment (Proprietary) Limited) (Tega Africa) in FY 2007 which is a South Africa based manufacturer and distributor of grinding mill liners and screen media, amongst others and this gave it access to manufacturing capabilities and customers in Africa’s mining and industrial markets. The company facilities in South Africa also give it access to the member countries of the Southern African development community (SADC). It continued its expansion and acquired Chile based Tega Industries Chile SpA (formerly Acotec SA) (Tega Chile) in FY 2011 which is involved in the manufacture of pumps, screen media and wear products. Its facilities in Chile give it access to the South American markets including Chile, Peru, and Bolivia (according to the F&S Report, Latin American countries contribute 40% of the global copper production and 8% of the global gold production output). In the same year, it also acquired Perth based Losugen Pty. Ltd. (Losugen) which specialized in the design, distribution, installation, wear monitoring of wear liners, rubber lining, screens for mining handling industries. The company increased its market share in Australia by acquiring its competitor at the time, which gave it access to a ready platform to launch conveyor accessories and screens in that market.

Total installed capacity of the company at the end of FY2021 is 24558 tonnes compared to 22677 tonnes at the end of FY2020. Capacity utilization in FY21 was 58% compared to 57% in FY2020

Revenue from operation from outside India constituted 84.48%, 86.42%, 85.92% and 85.83% of its revenue from operations in the three months period ended June 30, 2021, and FYs 2021, 2020 and 2019, respectively. Revenue from operation from outside India include North America, South America, EMER (Europe, Middle East and Russia), Africa, and Asia Pacific (South-East Asia and Australia) which constituted 17.66%, 19.23%, 14.18%, 21.18% and 12.23% of its revenue from operations for the three months period ended June 30, 2021, and 13.74%, 24.71%, 15.49%, 22.62% and 9.85% of its revenue from operations in FY 2021.

For the last three fiscals, the company is present in 513, 498 and 479 installation sites, respectively, in over 70 countries. Further, for the three months period ended June 30, 2021, it is present in 212 installation sites.

The company focus end-customers are mineral processing sites involved in gold and copper ore beneficiation, accounting for 34.92% and 27.25% respectively of its sale of products as an average of the last three fiscals and 45.48% and 20.76%, respectively, of its sale of products for the three months period ended June 30, 2021.

The predominant raw material used for manufacturing the company's products is rubber compound, which it manufactures in India from primary raw materials including carbon black, high grade natural rubber, polyurethane rubber, and styrene-butadiene rubber. It also exports the rubber compound manufactured by it as an intermediate raw material to its subsidiaries, Tega Chile and Tega Africa, to ensure quality consistency in the products manufactured at their manufacturing facilities. It exported 33%, 18%, 16% and 14% of the total rubber compound manufactured in the three months period ended June 30, 2021, and in FYs 2021, 2020 and 2019, while the remaining quantity was to be used for manufacturing operations in India. The other major raw material for manufacturing products is reinforcement including wear plates, casting and aluminum which is typically procured separately for each manufacturing facility.

The company plans to expand its existing capacity at Dahej and Samali facilities in India. Further it plans to set up a new manufacturing facility in Chile evaluating the growth trajectory in South America.

The company intends to continue to actively pursue acquisitive opportunities and strategic alliances with targets that are complementary to its business. Particularly, it will seek to make acquisitions that provide it with access to new technologies, or new customers, or new geographies.

The Offer and the Objects

The offer comprises an offer for sale by selling shareholders of up to 1366978 equity shares aggregating to Rs 619.23 crore at the upper price band of Rs 453 and Rs 605.56 crore at the lower price band of Rs 443. The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders, in proportion to the offered shares sold by the respective selling shareholders as part of the offer.

Promoter Madan Mohan Mohanka post-issue shareholding shall decrease to 8.1% from 13.07% pre issue shareholding while Manish Mohanka shall decrease to 11% from 11.98%. Other promoter Mehul Mohanka and NFSPL are not selling equity shares. Promoter Group Marudhar is also not selling equity shares

Wagner post-issue shareholding shall decrease to nil from 14.62% pre issue shareholding.

Strengths

The company is the second largest producers globally of polymer-based mill liners in terms of revenues as of June 30, 2021, in a near oligopolistic market structure. It is present across the value chain of a mineral processing site, providing a wide range of products and solutions for processing across different stages of mineral processing.

The company’s engineering capability, which has evolved over decades, has enabled it to consistently offer quality, complex manufactured products within stipulated timelines, allowing it to reduce downtime and maximize operational efficiency for customers, and forge robust relationships with customers leading to high recurring revenues

The company's products are critical to the overall productivity of a mineral processing site. They are a relatively low-cost component in a unit’s operations; however, they play a critical role in determining a unit’s productivity, in terms of throughput, lower grinding media consumption, lower energy consumption and lower downtime, leading to lower operating costs for customers.

Generally 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. This is due to the high cost of initial planning involved, the lead time required for approval, degree of certainty of the products of an established supplier, the high cost of downtime or shutdown of a site and relatively lower percentage cost of its components in the total operating costs of a mineral processing site. It takes from nine months to one year to become an approved supplier at every customer site and once approved, these approvals do not have an expiry period.

The company is well positioned to cater to customers across the world with on-ground presence in all major mining locations, whichcomprise large global mining companies as well as small and medium size companies in the mining and mineral beneficiation industry in developed countries as well as in emerging regions.

The company is insulated from mining capex cycles, as its products cater to after-market spends, providing recurring revenues. After-market spend for a mining processing unit comprises regular operating expenses which include costs of wear and separation parts, grinding media, power consumption, liners, and other regular operating expenses.

The company’s strong in-house R&D has allowed it to register 8 global patents and several trademarks. Its in-house R&D and manufacturing capabilities, including design, process engineering and manufacturing facilities, allow it to turn around customized designs in a short time frame, offer comprehensive solutions and better service standards to its customers and cross sell multiple products to customers. The company undertake multiple stringent quality checks and have been awarded Integrated Management System (IMS) certification by SGS United Kingdom Limited, which are: Quality Management System (QMS) – ISO 9001:2015 (India, South Africa), Environment Management System (EMS) – ISO 14001:2015 (India) and Occupational Health & Safety Management System (OHSMS) – ISO 45001:2018 (India).

The company has 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 it in 2018. This product is targeted towards large mineral processing units which historically or conventionally had relied on traditionally used steel liners. As of June 30, 2021, order book for DynaPrime includes 28 target sites.

The company has a track-record of servicing leading global mining companies for a long period of time and in several cases, relationships with key customers span more than 10 years, leading to high repeat revenues for them. Its repeat business from existing mineral processing sites accounted for 76.28%, 74.29%, 75.43% and 79.72% of revenue from operations in the three months period ended June 30, 2021, fiscals 2021, 2020 and 2019, each year. Conversion revenue (i.e., revenue from new sites added in a year) accounted for 19.26%, 25.13%, 22.35% and 18.09% of revenue from operations in the three months period ended June 30, 2021, FYs 2021, 2020 and 2019.

Weaknesses

The company's global manufacturing operations are subject to risks that are specific to each foreign country where its manufacturing facilities are located, being Chile, South Africa, and Australia. Chile and South Africa have experienced periods of political uncertainty and social unrest in the past, such as the recent protests in Chile in FY2020.

Any shortfall or delay in the supply of raw materials or an increase in raw material costs may adversely affect the pricing and supply of its products and shall have an adverse effect on business, results of operations and financial condition. The company is dependent on a few key suppliers of certain raw materials and do not have long term contracts or exclusive arrangements with these key suppliers

The company is exposed to foreign exchange rate fluctuations (mainly in USD, CAD, AUD, EUR, SGD, ZAR, CLP, GHS, GHC) in respect of revenue from overseas business in foreign denominations, foreign currency denominated borrowings, currency translation losses for the purpose of preparing consolidated financial statements (which are presented in Indian rupees), on account of global operations and value of foreign assets.

The company activities involving the manufacturing process can be dangerous and can cause injury to people or property in certain circumstances. A significant disruption at any of the manufacturing facilities may adversely affect production schedules, costs, sales, and ability to meet customer demand.

The company does not have long-term agreements with most of its customers. Any changes or cancellations to orders or inability to forecast demand for its products may adversely affect business, results of operations and financial condition

The company is subject to strict quality requirements and any failure to comply with quality standards or product defect may lead to the cancellation of existing and future orders, reputational risks, and liability claims.

The company failure to obtain or renew necessary regulatory approvals, licenses, permits in a timely manner, or at all, may adversely affect business and financial condition.

The company is subject to various laws and regulations in jurisdictions where it operates, including environmental and health and safety laws and regulations, which may subject it to increased compliance costs, which may in turn result in an adverse effect on financial condition.

Valuation

For FY 2021, consolidated sales were up by 18% to Rs 805.52 crore. OPM rose 770 bps to 23.3% which led to 76% increase in operating profit to Rs 187.48 crore. Other income increased 378% to 51.16 crore while interest cost fell 19% to Rs 17.28crore and depreciation increased 5% to Rs 40.18 crore. PBT increased 215% to Rs 15.57 crore. Tax expenses were Rs 47.46 crore compared to credit of Rs 6.26 crore. Net profit increased 108% to Rs 136.41 crore.

At the higher price band of Rs 453, the offer is made at around 22 times its EPS of Rs 20.6 for the period ended March 31, 2021, on a post-issue equity share capital of Rs 66.29 crore of face value of Rs 10 each. Listed industry peer of the company is AIA Engineering.

In comparison AIA Engineering trades at 31 times its FY2021 EPS of Rs 60 at the current market price of Rs 1856.