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...strong player in a high growth industry

Tega Industries (Tega) 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. These are ‘critical to operate’ consumable products, with strong industry dynamics such as low cyclicality (opex constitutes 3x of capex; depleting ore grades), high entry barriers (long customer conversion cycle) and oligopolistic market (top 5 players control 50% market share). Globally, the company is the second largest producer of polymer based mill liners deriving 88% of its sales from outside India. It has 6 manufacturing facilities, 3 in India and 3 abroad having more than 55 product portfolios spread across multiple geographies.

We believe Tega is well positioned to outpace industry growth due to 1) diversified product portfolio coupled with 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 relationships with customers (>10 years) with sticky customer base as 75%+ sales comes from repeat orders, 3) de-risked business model due to low customer concentration (top 10 customers: 20% of sales) and diverse manufacturing base (India, Chile, South Africa, and Australia) 4) cross selling of products and capacity expansion.

Q1FY23 performance for the company remained strong despite challenges witnessing 41%/96%/94% growth in revenues/Ebitda/PAT while margins expanded 532bps despite higher commodity inflation and higher freight cost. We expect the company to deliver sales/EPS CAGR of 15%/17% over FY22-24E with healthy return ratios of 17%. The stock currently trades at 20x on FY24 EPS and we value Tega Industries at PER of 24x FY24E EPS to arrive at a target price of  569 and initiate Buy on the stock.

Diverse portfolio and high entry barriers ensure gain in market and wallet share

Tega remains well positioned given its diversified product portfolio comprising 55 mineral processing and material handling products installed at 450 customer sites in about 70 countries. Company’s strong customer base (>10 years) with sticky customer base (+75% sales coming from repeat orders) and low customer concentration (top 10 customers contributing 20% of sales) along with diverse manufacturing base (India, Chile, South Africa, and Australia) helping to sustain its steady growth rate and strong outlook ahead

Innovative products like Dynaprime an ice breaker product

The management expects Dynaprime (25% of FY22 sales) to be the key growth driver and acceptance for the same has been increasing. The segment is likely to grow at a CAGR of 25%+ (33% growth in FY22) in near to medium term mainly on account of key benefits like higher throughput, lower power consumption and manpower cost over steel mill liners. Currently, global steel mill liner market is US$900mn (Tega’s market share is 5%) and collectively, it is the addressable market for the company as it aims at replacing the steel mill liners with its flagship product (Dynaprime) given long standing customer relationships.

Capacity expansion to drive volume growth

Tega expects to triple its capacity in Chile through a mix of brownfield and Greenfield expansion, entailing capex of ~ 700mn in FY23E, which would cater to the Latin America market. Chile capacity is ~3,000MT with capacity utilisation of ~80%. The company is gradually adding capacity there and it is expected to reach 8,000MT by FY25.

Second-largest producer in an oligopolistic market

Tega is the world’s second-largest producer of polymer-based mill liners (fifth largest in the overall liners market) in an oligopolistic market (top 5 players account for 50% market share). The mill liner industry is expected to grow at 6% CAGR over the next 10 years driven by greater demand from gold/copper and depleting ore grades. The industry is characterised by strong fundamentals such as low cyclicality as opex constitutes 3x of initial capex in the mineral processing industry and high entry barriers as customer conversion cycles are fairly long (12-18 months) along with high costs associated with supplier switch.

Outlook and Valuation

Tega Industries, being the second largest producer of polymer-based mill liners and fifth largest in overall mill liners industry with offerings of ‘critical to operate’ consumable products, high entry barriers (long cycle of customer conversion), focusing on opex spends (~3x of capex) and diversified manufacturing base (India, Chile, South Africa and Australia), customer stickiness (75% revenue comes from repeat orders and relationship with key customers span more than 10 years) and reducing client concentration (Top 10 customers contributes 20% of revenue), we believe the company is well positioned to leverage the opportunity which is available in the market. With introduction of new products such as DynaPrime (unlocked US$ 900 mn opportunity for converting metallic liners), the company has set new avenues for driving the growth. We expect the company to deliver sales/EPS CAGR of 15%/17% over FY22-24E with healthy return ratios of 17%. The stock currently trades at 20x on FY24 EPS and we value Tega Industries at PER of 24x FY24E EPS to arrive at a target price of  569 and initiate Buy on the s

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