Tega Industries IPO Next Week: Should You Buy?

Tega Industries will be coming out with an Initial Public Offering next week. The entire IPO will be an offer for sales as existing shareholders look to exit the company.

The IPO would see shares worth Rs 620 crore on offer. The existing shareholders include the promoters Manish Mohanka and Madan Mohan Mohanka. An investor, Wagner Limited, will be exiting the company as well.

Tega Industries was initially founded in 1971 by partnering with a Swiss Company, Skega AB. The company supplies various critical consumable products for the mining and bulk solids handling industries.

The range of products include specialised abrasion-resistant rubber, polyurethane, steel and ceramic-based lining components. These products are used by Tega’s customers who belong to the mining industry.

The miners’ reliance on such critical consumables and the value they add, ensures continual revenue for the company.

The company’s entire product portfolio is spread across 55 products, that contribute to 95 per cent of the company’s revenues. However, the company’s client base is largely based outside India.

These foreign clients make up for 85 per cent of the company’s revenues.

The company’s manufacturing bases is located in mineral rich areas such as Bengal, Chile, South Africa, and Australia. The location of the manufacturing bases allows the company to access customers easily, reduce logistical costs, and cater to a cluster of miners in the area.

In a bid to improve its sales in these critical areas, the company had acquired new companies in South Africa and Chile in 2007 and 2011 respectively.

According to the company, it operates in an oligopolistic market. The company is the world’s second largest polymer based milling products manufacturer.

Its products are extremely critical to smooth functioning, but are a relatively low-cost component in the processing phase. Though new entrants can offer cheaper products, mining units are reluctant to change supplier given the low cost contribution.

Hence, companies are unlikely to scrimp on such expenses, and are ready to buy only from a set of trusted suppliers.

“In our experience, 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 our components in the total operating costs of a mineral processing site,” says the company’s DRHP Prospectus.

The company’s revenues have increased from Rs 643 crore in fiscal 2019 to Rs 856 crore in fiscal 2021. Further, the company’s profits have almost quadrupled form Rs 32 crore to Rs 136 crore during the same period. Margins too have improved from 16.5 per cent to 27.8 per cent.

Usually companies applying for IPOs see a sudden rise in profits. However, these profits could be a result of the boom in commodities. Hence, once the commodity boom subsides, the company is unlikely to see a similar rise in revenues and profits.

Tega is being valued at Rs 443-453 per share for the IPO, while the company’s diluted earnings per share stand for FY21 stand at Rs 20.48. Therefore, the IPO is approximately priced at 22 times earnings.

However, when the average diluted earnings per share for the last three years is used, the IPO is priced at 31 times earnings.

Key Risks

Political Instability

The company has large operations in Chile and South America. These countries have seen political and social unrest in the past. In addition, some countries have seen the rise of resource nationalism, where governments ask for increased royalties or claim back the mines. Such actions could affect Tega.

Supplier Concentration

The company is highly dependent on a few key suppliers. Any supply-chain issues or supplier side problems could have an adverse effect on Tega.

Quality Issues

The oligopolistic nature of the company comes from the client companies’ reluctance to take up new suppliers. They are ready to pay up a little extra for a low-cost product rather than see their operations come to a halt. Hence, product quality is of utmost importance for Tega.

Cyclicality

The mining business is highly dependent on the commodity cycle. During cyclical troughs, the company could potentially see margin compression and other issues.

Capital Intensive Business

According to the company, the business is capital intensive and requires continuous investment in fixed assets to grow. In addition, the nature of the business also requires companies to invest in inventories, increasing the working capital requirements.