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Acquisition to enhance product offerings

Tega Industries acquired McNally Sayaji Engineering Ltd (MSEL) through CIRP process. Post completion, this would be Tega’s first acquisition in India and fourth worldwide. McNally Sayaji Engineering offers solutions in the field of manufacturing and marketing of crushing, screening, grinding, material handling, and mineral processing equipment coupled with integrated customer support and aftersales service. The acquisition was made for a consideration of INR1.65bn which will be funded through mix of debt and equity. Rationale being that Tega was looking at an acquisition in the equipment space, considering the opportunity where global players do designing and get manufacturing done from smaller players. Tega does both designing and manufacturing, thus making it a perfect fit for the company. For 9M levels, sales for MSEL stood at INR1.2bn with EBITDA margin of 4.5% and the company could grow by 5-10% in FY23 and 15-20% thereafter. We maintain our positive stance on Tega on a) higher penetration opportunity for DynaPrime liners, to deliver 25-30% CAGR over FY22-25E, b) value accretive acquisition to diversify revenue stream and increase product offering, and c) sustainable EBITDA margins at 21-23% due to operating leverage. We maintain BUY with TP of INR750, valuing the stock at 22x Mar’25E EPS (10% discount to AIA Engineering).

* To offer packaged solutions to customers: McNally Sayaji sells downstream mining equipment, which will aid Tega’s product portfolio as global competitors like Metso are extending O&M contracts to customers which includes replacement of spare parts as well, thus restricting pure consumable companies like Tega Industries. Thus, it becomes vital for Tega to extend their product offering to counter these disruptive trends. The acquisition value is pegged at INR1.65bn (1x TTM sales), as MSEL’s FY22 sales stood at c.INR1.7bn, can be scaled up to INR2.5bn (15-20% CAGR) in near term and INR4-5bn in 5 years.

* USD20bn global market opportunity exists: Global market size of mineral processing equipment stands at USD20bn, while the domestic market stands at INR30-35bn. Advantages of the acquisition are: a) MSEL has strong brand recall among domestic mining companies like JSW Steel, Tata Steel, HZL, b) distributed manufacturing across 4 locations (Kumardhubi, Vadodara, Bengaluru, Asansol) with more than 100 acres of land to enable quick scale up and market share gains, c) improving sector dynamics due to consolidation (Elecon’s MHE margins up from -1% to +13% in 9M23) and d) product portfolio extension via coal/ash handling products

* To focus on domestic market initially: The company aims to focus on Indian market for initial period of 2-3 years to win back MSEL’s lost market share and will subsequently invest in technologies to launch its products globally. Rehash of portfolio will help MSEL compete with global companies like Metso, McLanahan and New Concept (Epiroc) and help to secure contracts at initial stage, thus increasing customer stickiness

* Maintain BUY with TP of INR 750: We forecast sales/EPS CAGR of 16%/28% over FY22- 25E, and maintain BUY with TP of INR750, based on 22x Mar’25E EPS. Key risks: sharp decline in global mining capex or sharp increase in freight costs.

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