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Growth guidance maintained; Risk reward turns favourable

Tega Industries sales in 3Q met guidance, however, lag in passing RM costs and material rise in other expenses led to lower EBITDA and PAT. Sales grew by 20% YoY driven by mill liners (+25% YoY), while non mill liner segment reported stable trend YoY. EBITDA at INR 510mn (+8% YoY), was impacted adversely owing to cost escalations – higher RM costs, ocean freight rates, and normalisation other overheads. Although Dynaprime liners reported a relatively slower growth (+16% YoY for 9M), company has maintained 25-28% growth guidance in the segment, as 2H is better owing to overlap with the shutdown period for mining sites. While RM costs are likely to be passed on with a lag (60% gross margins), company is likely to absorb the freight costs partially. Overall, the penetration opportunity for Dynaprime liners continues to remain strong (addressable market at USD 900mn) and cross selling of other products will help outpace the industry growth, while recent correction in stock price (-18% in 1M) has turned risk reward favourable. We upgrade to BUY with TP of INR590, valuing the stock at 25x FY24E EPS.

Strong sales growth offset by contraction in margins:

Net sales stood at INR2.58bn (+20% YoY). Growth has been driven by mill liners, ex. dynaprime 30%+, drove the healthy sales growth. Dynaprime segment reported a growth of 16% YoY in 9M. Gross margins contracted by 200 bps YoY at 57.1%, on the back of RM inflation. Rise in other expenses was on account of higher ocean freight rates (INR 200mn impact in 9M), maintenance expenses (INR 50mn impact in 9M), and normalised travelling expenses. We estimate 250bps impact on account of higher freight, 50% of which can be passed through, while balance 50% can be recouped through operating leverage. EBITDA at INR 510mn grew 8% YoY, as margins came in at 19.8%. PAT clocked growth of 6.5% YoY to INR 336 mn.

Raw material to be passed through, however, freight costs to be borne partially:

Although, company will pass on the raw material costs over 2 quarters (gross margin guidance of 60%), management highlighted that freight cost escalations may not be passed on completely. Company is facing freight challenge in USA and Canada, while other regions are being catered to by the local manufacturing operations driving the hedge against the freight costs.

Dynaprime to drive growth; Chile expansion commissioning in 24 months:

Dynaprime (19% of overall revenue) will be the growth driver with significant potential of market penetration (USD 900mn of addressable market). Further, non-mill products will increase the wallet share for the company. Its expansion in Chile is expected to be commissioned in 24 months (internal target of 18 months). Current revenue potential from the Chile plant is at USD 40mn and is expected to be doubled to USD 80mn post the expansion.

Upgrade to BUY; TP of INR 590:

: We have cut our EPS estimates by 7% to bake in the escalation in the freight costs. With the correction in the stock, we believe the risk reward has turned favourable. We upgrade to BUY, valuing the company at 25x FY24E EPS.

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