by Welcome back to Traders Ideology, there is an interesting IPO in the market. In this article, we will do a fundamental analysis of Tega Industries Limited, where we will discuss the business of the company, its promoters, its future growth prospects, key risk, and financials.
Then we will look at the IPO details along with the valuation of the company. Finally, we will conclude if it is worth investing in the IPO or not. Alright, let’s get started.
It is the IPO of Tega Industries Limited. That’s IPO window is live between 1st to 3rd December 2021. Actually, it is not an IPO but an OFS (Offer for Sale).
The difference between an IPO and OFS is that in an IPO, the company raises new funds by diluting its equity, whereas in OFS, the company doesn’t raise new funds.
It is just a change in ownership from promoters where they sell their equity to DIIs, FIIs, and retail investors. Now there is a misconception that an OFS is always bad.
The general understanding is that companies taking advantage of the recent IPO boom and selling their stake. While some companies do take advantage of OFS.
It is not always the case with every company. So IPO is not just about raising money.
Sure, raising money is one of the most important parts of an IPO. But what if the company already has a good amount of money and doesn’t need to raise more capital from the IPO? In that case, the company can still go on with the listing on the stock exchange, because the company that is listed on the stock exchange commands more credibility and name.
Of course, be it an IPO or OFS the most important part is the company’s fundamentals and valuation. This OFS of Tega Industries Limited is also similar, where companies not raising money for expansion, they just want to list themselves on the exchanges.
As public listed companies have more credibility when companies pitch to clients for businesses. Before you apply for the IPO, you should also look at the business of the company.
Disclaimer: This article is only for educational purposes. I do not recommend buying or sell so please consult your advisor and do your own research before investing.
Also, Read: Fundamental Analysis of IRCTC & Fundamental Analysis of DMART
Introduction
Established in 1976, Tega Industries Limited is an engineering company that manufactures engineering products for the mining industry. It basically helps the mining companies with critical components needed throughout the value chain of mining, screening, grinding, and material handling.
Its product portfolio comprises more than 55 mineral processing and material handling products. Globally Tega Industry is the second-largest producer of polymer-based mill liners that find application in grinding purposes.
Its products help mining companies with reducing downtime and maximizing operational efficiency that eventually result in higher revenues and profits.
Revenue Breakup of Tega Industries Limited
- If you look at the revenue breakup, around 85% of the revenue of the company comes from outside India, mainly from North America that contributes 13.7%, South America contributes 24.7%, Europe Middle East and Russia contributes 15.5%, Africa contributes 22.6%, and the Asia Pacific contributes 9.85%.
- South America and Africa are the largest markets. Although the revenue is nicely diversified across the world. The company is also expanding its operation in North America, South America, Australia, and South Africa.
Tega Industries Limited Fundamental Analysis
Tega Industries Limited Fundamental Analysis is as follows:
Business Model of Tega Industries Limited
- Its end customers are mineral processing sites majorly involved in gold and copper or restriction. Tega Industry has 6 manufacturing sites including three in India, whereas one is in Dahej, Gujarat and the other 2 in West Bengal and the other three sites are in major mining hubs of Chile, South Africa, and Australia. Their current overall utilization is 54%.
- The company can manage further demand in the future with its existing capacities. The company has 18 global and 14 domestic sales offices.
- One of the most interesting aspects of Tega Industry businesses is that its products are very specialized and critical to operate and have high barriers to replacement or substitution.
- For example, it is the second-largest producer of polymer-based mill liners in 2020, which is nearly an oligopolistic market that is a market controlled by very few players.
- Mineral processing sites do not tend to switch to a substitute supplier even if the product offered by a new entrant or status substitute suppliers is relatively cheaper.
- This is due to the fact that there is a high cost of initial planning involved in the lead time required for approval, then the degree of certainty of products of an established supplier, then the high cost of downtime or shutdown of a site.
- Tega Industry has the flexibility to maintain a high margin throughout the period of its association with the mining processing site.
- Interestingly, the company generates recurring revenue as the mining process includes regular operational expenses in the last three years, around 75 to 80% of the revenue of the company is from repeat orders.
- In fact, the company is not impacted by the cyclical nature of the mining business or fluctuation in commodity prices. If you look at the innovations company has been granted 8 patents and 4 patent applications have been filed for approval.
Promoter & Leadership
- If we look at the promoter of the company, it includes Madan Mohan Mohanka, who is the Chairman Executive Director of the company and holds an engineering degree and MBA from IIM Ahmedabad.
- He has been associated with the company since its inception.
- The next promoter is Mehul Mohanka, who is the MD and Group CEO.
- He holds a master’s degree from the University of Pittsburgh and an advanced management program from Harvard University, he has been associated with the company for 2 decades.
- Overall, the senior leadership of the company is looking very experienced.
Key Risks
- If you look at their risk, then one of the risk is that company gets repeat business from its existing customer. So, any loss in existing customers can impact its business.
Future Growth Prospects
- If you look at the future growth, there is a shift from the non-renewable sector to the renewable sector, be it your electric vehicle or solar power, the focus is on the renewable sector.
- One metal that is the most essential for the renewable sector and energy transmission is copper. So on one side, there will be a slowdown in coal mining, but there will be growing demand for copper mining, there will be demand for lithium mining due to its usage in lithium batteries, then there will be continued demand for gold then there is high demand for infrastructure building in India and government also has a lot of focus on manufacturing with PLI scheme.
- All these factors would eventually result in more demand for metals and minerals. This would continue to drive the business of metal companies and eventually Tega industries.
- If you look at the global market size, the global crushing screening and mining process equipment market size is estimated at around $20 billion in FY 20.
- Although there was declining growth due to the COVID industry is likely to recover and forecast to reach $37 billion by 2030 at 6.3% CAGR growth.
Financials of Tega Industries Limited
The financials of Tega Industries Limited are as follows:
Revenue
- If you look at the revenues, Tega industries revenue has grown from 643 crores in FY 19 to 856 crores in FY 21.
Net profit
- Its profits have grown significantly from 32 crores in FY 19 to 136 crores in FY 21.
- One of the reasons for high growth in FY 21 is due to an increase in the operating margin that increased from 16.8% to 27.8% in FY 21 due to lower expenses on account of COVID restriction.
ROE and ROCE
- If you look at the ROE and ROCE, the company’s ROE has increased from 8.14% to 22.23% and ROCE has increased from 11.2% to 24.7%.
- Although now that the economy is opening up I expect the expense cost to increase and margin would reduce that would impact the profitability.
Debt to Equity Ratio
- The company has a debt to equity of 0.31 which is comfortable. Overall financials for the last 3 years are looking decent.
Cash flow
- As far as future growth is concerned company has a cash balance of 47.8 Crore as of FY 21.
Tega Industries IPO Details
- Tega Industries IPO window is between 1st December to 3rd December 2021, the IPO price band is between Rs 443-453, the shares are available at a face value of Rs 10, and the lot size is 33 shares.
- The total investment for one lot would be Rs 14,949, the issue size is Rs 619 which is a complete Offered for Sale as the main intention of this OFS is to list the company in the Indian Exchanges to gain credibility. This is a very small IPO.
- Now, there can be a question that when the company has total debt of 187 crores, then why can’t they raise money or use existing money to close this debt.
- The reason is that the leverage cost in the sector is very low. Hence, they don’t want to close the debt which is well under control.
Valuation
- At a higher price band of Rs 453, Tega Industries would command a market cap of 2600 Crore.
- The company had an EPS of 24.1 in FY 21. So, that means the PE ratio would be around 18.7.
- Although, if you look at the last 3 year average EPS of 16.87, the PE multiple would be around 26.8. Now, that looks like a very reasonable valuation.
- If we look at the valuation of other listed players company has mentioned AI engineering as its listed peer and it’s trading at a PE of 30.6.
- Overall the valuation of the industry is looking very reasonable. As far as grey market premium is concerned company is commanding the latest gray market premium of around 425 rupees.
- Today’s GMP for Tega Industries IPO is ₹425. The IPO current grey market premium was last updated on Dec 2nd 2021 07:58 PM. The cap price for Tega Industries IPO is 453.
- The estimated listing price for Tega Industries IPO as of current GMP is ₹878. The expected gain/loss per share in terms of percentage is 93.82%.
- So that’s almost 66% premium. One of the reasons for the high premium is that the IPO size is very small. So there is more demand and less supply that increases the grey market premium and companies available at decent valuations.
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Conclusion
- Overall, if we conclude Tega Industries is an engineering company that manufactures critical components for the mining industry that find application across the value chain of mining activities.
- The company has strong dominance in the global market, which it presents in every geography. The promoters or leadership of the company are also looking solid.
- As far as future growth is concerned, mining would continue to grow due to demand for metals like copper, iron, gold, silver, etc.
- Although it is not a very fast-growing sector, Tega Industries’ profits have grown at a very good rate and have decent profitability. Overall, it is looking fundamentally strong.
- As far as valuation is concerned, again, the valuation is looking good. There is also good demand in gray market premium. So this company is looking good for short-term listing gain as well as a long-term investment.
- I’m going to apply for this IPO. Now tell me in the comment, what is your take on this IPO? Will you apply for it or not?
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