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Aiming at a steady growth as product gaps are addressed

Tega Industries reported a beat on our estimates. Net sales grew 36% YoY to INR3.96bn, 19% above JMFe (8% on comparable basis), as it included sales from newly acquired McNally Sayaji under equipment segment. Consumables segment registered healthy growth of 24% YoY. EBITDA was 27% above estimates (INR1.03bn; +49% YoY), as margins in equipment segment were booked at higher than normal range due to lower expenses in initial consolidation phase. Margins expanded by 220bps YoY to 25.9% (JMFe: 24.4%, 3Q22: 22.7%). Management highlighted that medium term sales growth is expected to be 15% CAGR across both segments, while margins in consumable business have further room to expand as passthrough of higher RM costs is still underway. Thus, we expect blended EBITDA margins in 21-22% range due to a) strong volume growth trajectory, b) near completion of price hike cycle and c) peak freight costs already behind. However, ramp up in revenue contribution from equipment to dilute margins to certain extent. We maintain our positive stance on Tega on a) higher penetration opportunity for Dynaprime liners, to deliver 25-30% CAGR over FY23-25E, b) cross selling opportunities of other products and equipment (McNally Sayaji acquisition) to aid in outpacing the industry growth, c) green field expansion in Chile to increase growth opportunity in LATAM and d) sustainable EBITDA margins at 21-22% due to operating leverage. We maintain BUY with a revised TP of INR900, valuing the stock at 22x Mar’25E EPS (10% discount to AIA Engineering).

* Robust volumes drives growth: Net sales stood at c.INR3.9bn (+37% YoY), where contribution from consumables was INR36bn (+24% YoY) and from equipment was INR368mn, which includes McNally Sayaji’s revenue from 24th Feb. During FY23, the company registered volume growth of 16-17% (similar in 4Q), with price increase of 5- 6% and forex gain of 1%. Mill liners (including Dynaprime) grew at 20-21% in FY23, which form 70% of sales and non-mill liners grew at a higher rate of 25-26%.

* Healthy margin expansion: Inclusion of McNally Sayaji elevated EBITDA margins to 25.9% vs 23.8% in 4QFY22. Margins for the consumable segment were 26.5% while margins for equipment segment were 20% (much higher than normal levels). Management anticipates margins to sustain, as price passthrough cycle is completed over next 2 quarters, while equipment segment margins normalise. During 4QFY23, EBITDA grew by 49% YoY to INR1bn and for FY23 it was INR2.7bn registering growth of 48%.

* Capex on track; to double capacity in 3-4 years: The company maintained its guidance of doubling capacity in 3-4 years and will ramp up Chile plant in FY24 and FY25. Overall, the capex plant remains steady at USD30-35mn over 3 years. Of which, USD 22mn would be spent on Chile and balance in India and South Africa plants.

* Maintain BUY with revised TP of INR900: We forecast sales/EPS CAGR of 21%/20% over FY23-25E, as we expect penetration in its Dynaprime range to drive growth and expect margins to sustain at 22% levels. Maintain BUY with revised TP of INR900, at 22x Mar’25E EPS (10% discount to AIAE). Key risk: sharp decline in global mining capex

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