Tega Industries predominantly caters to the mining and abrasives sector and derives nearly 86.4% of its total business revenues from global operations. Tega is a leading manufacturer and distributor of specialized consumable products for the global minerals, mining and abrasives industry and is among the world leaders in polymer based mill liners.
Some of its key products include wear-resistant rubber, polyurethane, steel and ceramic based lining components etc. Tega operates 6 plants of which 1 is in Dahej in Gujarat and 2 are in West Bengal among domestic plants. Globally, it has manufacturing sites in mineral rich nations like Australia, Chile and South Africa.
Let us first look at the structuring of the Rs.619.23 crore IPO of Tega Industries
- Tega IPO will be a 100% offer for sale with the OFS comprising of 1,36,69,478 shares which are worth Rs.619.23 crore at the and at the upper price band of Rs.453.
- Out of the 3 participants in the OFS, the 2 promoters Madan Mohanka and Manish Mohanka will tender 33.15 lakh shares and 6.63 lakh shares respectively. In addition, PE investor, Wagner, will also tender 96.92 lakh shares in the OFS.
- On completion of the OFS, the promoter stake will come down from 85.17% to 79.17%. Public shareholding will stand enhanced to 20.83% post the IPO.
Since there is no fresh issue component, there will be no fresh funds coming in. The IPO sole purpose is to list the stock and to create valuation metrics for the stock.
The cost controls have been a standard element of the company’s financial performance, which is evident from the growth in profits vis-à-vis growth in sales. Tega showed sales growth of 27% over 2019 while EBITDA more than doubled over 2019 and net profits expanded 4-fold over FY-19.
If you consider the Buffett standard measure, both the ROE and the ROCE are comfortably above the 20% mark, making it an attractive valuation bet. Even the operating EBITDA margins have expanded smartly over the last 3 years.
Tega Industries is expected to have an indicative post-listing market value of Rs.3,003 crore implying a P/E ratio 22X on historical earnings. If you extrapolate earnings growth into FY22 earnings the P/E is a lot more reasonable, especially considering the non-cyclical nature of business as well as its robust capital return ratios.
How should investors approach the Tega Industries IPO?
Here are some key points that investors must consider before investing in the Tega Industries IPO.
- The company operates in the post-mining support space, which is less vulnerable to business cycle. Its deep customer relations become an entry barrier for others.
- With 86% revenues from global markets the valuations are less likely to be impacted by domestic cycles, a natural advantage in the midst of the COVID phase.
- The participation of global PE investor, Wagner, in Tega Industries since 2011 is affirmation of the private equity interest in the stock.
- The profits of Tega are favourably impacted by spike in mineral prices and that is seen in profit growth. Outlook likely to get better with economic recovery on the anvil.
- Tega has consistently improved profits despite operating at just about 58% capacity utilization so the scope for operating leverage improvement is huge.
In terms of valuation, Tega Industries is 22 times historical FY21 net profit and looks reasonable with profit growth extrapolated. However, there is an element of risk here. The resurgence of the B.1.1.529 variant has its origins in South Africa and that could be a major headwind. The stock is reasonably priced, but remains a high-risk investment idea. Investors have to take a decision accordingly.
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