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Expanding product offerings to drive growth outperformance

Tega Industries (Tega) is a leading player in the global Mill Liners industry with a market share of 5%. Mill Liners being consumables exhibit low demand cyclicality. These are highly engineered and customised products and though their contribution to the operating cost of mills is low any failure leads to high shutdown costs for the mills. This leads to customer stickiness with 75-80% of Tega’s sales being from repeat orders. We expect Tega to materially outpace the expected global industry growth of 6% led by expansion in product portfolio leading to expansion in TAM and addition of new sites. Also, the recent acquisition of McNally Sayaji (MSEL) gives entry into the OEM business, gives access to new customers and materially expands the TAM. We forecast sales/EPS CAGR of 20%/14% over FY23-26E for Tega led by a 16% CAGR in the consumables business and incremental contribution from MSEL (acquired in Feb-23). Maintain BUY with revised TP of INR1130 (30x Sept’25E EPS)

* Leading player in the Mill Liner industry: The global Mill Liners industry is USD 1.7bn in size and is dominated by a few large players. Tega with a market share of 5% ranks 5th globally and is also the 2nd largest producer of polymer-based mill liners (FY23 exports at 86% of consolidated revenue). Demand cyclicality is low as Mill Liners are a consumable product and after-market spends over the lifecycle of a mill are typically 3x the upfront capex spends. The global mill liner industry is expected to grow at 6.3% CAGR till 2030 exceeding the growth in underlying commodities due to depleting ore grades.

* High entry barriers drive strong margins: Mill Liners and other mineral processing products are highly engineered products and are customised for each mill and each plant location. Each mining site is an individual customer based on the hardness of the ore. Mill Liners account for only about 3-15% of the mill’s operating costs but the cost of mill stoppage in case of failure is very high. Due to this customers do not tend to easily switch to a substitute supplier and conversion cycles are long (12-18 months). This has led to 75- 80% of Tega’s sales from repeat orders and strong gross margins of 58-60% historically.

* Growth outlook remains healthy: Tega is likely to materially outpace the expected growth of 6% in the global mill liner market led by expansion in its product portfolio and addition of new sites. The launch of DynaPrime product range (composite of rubber and steel) in 2019 has unlocked an opportunity to disrupt the traditional Steel Liner market (USD 900mn; new market for Tega). This expands the TAM from USD 400mn (rubber linings) to USD 1.3bn for Tega. Management has guided for 15% volume CAGR for the consumables business (mill liners and other products) aided by 25% CAGR in DynaPrime.

* Maintain BUY with TP of INR1130: We forecast sales/EPS CAGR of 20%/14% over FY23- 26E for Tega led by a 16% CAGR in the consumables business and incremental contribution from MSEL (acquired in Feb-23). EBITDA margins are likely to decline from FY23 levels due to addition of MSEL business. Return ratios after falling in FY24 are likely to inch up going forward. Maintain BUY with TP of INR1130, at 30x Sept’25E EPS. Key risks: Sharp decline in global mining output and surge in raw material and freight costs.

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