Company Name – Tega Industries Limited (Tega)
Current Share Price – INR 640 (January 20, 2023)
Market Cap – INR 4,241 cr
1. What is interesting about the stock?
From extracting raw minerals to refining them for commercial use, the mining processing industry plays a crucial role in fueling the global economy. But as the demand for resources increases, so does the pressure to innovate and improve efficiency. The mining industry is facing the pressure of depleting ore yields as the demand for metal ores, especially copper and gold, continues to grow at a CAGR of 6.3%. Tega Industries is a key beneficiary of this trend as the demand for consumables is set to grow in the mineral processing industry.
Tega was established in 1978 as a joint venture with Skega AB, a Swedish company. Tega manufactures 'critical-to-operate' consumable products for the global mineral beneficiation, mining, and bulk solid handling industries. Tega has 6 manufacturing plants, including 3 in India and 3 in the major mining hubs of Chile, South Africa, and Australia. In the oligopolistic industry of mill liners, Tega is the fifth-largest producer in the world with a market share of 5-6%.
Tega's products are primarily used in the gold and copper mining industry. Mills are used in mining to grind crushed ore into desired particle sizes for further processing, and mill liners protect the mills from wear and tear caused by grinding harsh raw materials. Despite accounting for just 3-15% of a mill's operating cost, liners are a critical factor in determining the mill's longevity and efficiency.
Mineral Processing Value Chain
The mineral beneficiation process starts by reducing the size of the extracted lumpy ores with crushers. The resulting crushed material is then fed into the mill through chutes. Inside the mill, the ore is ground into smaller particles and screened to create multiple grades of granulated ore, based on the final application of the metal.
Apart from the mill and mill liners, the entire value chain involves parts like trommels, chutes, hydrocyclones, and other conveyor products where Tega has a significant presence. Trommels are mechanical screening machines while hydrocyclones are used for dewatering the minerals.
The comminution circuit diagram above (taken from Tega’s DRHP) shows the various elements in the value chain.
Mill Liner Industry
Mill liners can be classified into three types based on the composition of the material: metallic, rubber, and composite. Steel/metal mill liners are preferred in large mills while rubber mill liners are preferred in small and medium-sized mills up to a diameter of 6.5 meters. Composite mill liners, made of a combination of steel alloys and rubber compounds, are the fastest-growing segment, with an expected CAGR of 8.4%. They are gaining prominence due to their easier installation and superior performance compared to the other two segments.
Tega’s Product Details
Tega manufactures 55 SKUs across the mineral processing value chain. The mill liner segment contributes to 75% of the overall revenues for Tega. The non-mill liner business which includes hydrocyclones, screens and trommels, and conveyor products, has higher gross margins and piggybacks on the mill liner business.
Tega is the 2nd largest producer in the world of polymer-based mill liners (a subset of composite mill liners which uses materials such as polyurethane and polyethylene) with a 16-18% market share. In FY2018, Tega launched a new product known as “Dynaprime” which is a composite mill liner made of steel and rubber. With the launch of Dynaprime, Tega has unlocked an addressable market of USD 900 million targeted at the metallic mill liner industry. The Dynaprime range of products has 50%a higher shelf life, 40% lesser weight, and 35% higher realization than traditional metallic mill liners due to superior performance. The company aims to grow Dynaprime at a CAGR of 25-30% and it currently comprises 20% of overall revenues.
The global mineral processing industry was estimated to be USD 20 billion in 2020 and is estimated to grow at a CAGR of 6.3% to reach USD 36 billion by 2030. Demand for Copper continues to grow amidst the backdrop of increased focus on renewables, smart home appliances, and electric vehicles across the world. The demand for gold is expected to experience moderate growth by being perceived as an economically safe asset class apart from its primary use in the jewelry industry. On the supply side, declining ore grades are expected to bring on higher capex spending in the mining industry.
The global mill liner industry is valued at USD 1.73 billion industry as of 2020 and is expected to grow at a CAGR of 6%. About 50% market share is captured by 5 major players - Metso- Outotec, Me Elecmetal, Bradken, PT Growth, and Tega Industries. Demand is primarily driven by Latin American countries which account for 40% of global Copper production and 8% of global gold production. The demand for mill liners is driven primarily by the need for replacement due to wear and tear. Most of the demand comes from the replacement market, with an estimated ratio of 70-80% compared to 20-30% for new installations in a given year.
Key Investment Arguments
Tega operates in an industry with high barriers to entry - Mineral processing sites are unlikely to switch from one supplier to another due to the high costs of initial planning, the lead time required for approval, and the high cost of downtime (~ USD 200k/hour) at a site compared to the cost of consumables. The oligopolistic nature of the industry reflects this trend. Tega has established long-standing relationships with its clients, supplying the top 20 mining companies in both copper and gold segments. Some key clients have maintained their relationship with the company for over a decade, demonstrating a high level of customer loyalty and satisfaction.
Constant innovation and the huge scope of Dynaprime - Tega's in-house R&D and manufacturing capabilities enable the company to quickly provide customized designs and comprehensive solutions with high service standards to its customers. This allows Tega to cross-sell multiple products to its customers. Dynaprime has proven to be a game-changer for Tega. 9M FY23 sales for Dynaprime stood at INR 165 cr as compared to INR 135 cr in 9M FY22. Dynaprime has been able to gain a 2.5% market share from metallic mill liners in just 4 years of launch. Tega has successfully commercialized Dynaprime in Chile, the USA, Canada, and Europe.
Diverse Manufacturing base ensuring logistical advantages – Tega's six manufacturing plants currently have a capacity of 25,000 metric tons per annum (MTPA). Located in proximity to important mining, industrial, and material-handling regions, these facilities are shielded from local supply chain interruptions. Additionally, Tega's decision not to outsource any of its products minimizes external dependencies and enables the company to provide tailored solutions with a quick turnaround. Tega is also undergoing a major capex to the tune of INR 250 cr with the majority coming up in Chile followed by South Africa and India. This will further increase the total capacity to 35000 MTPA by Q1 FY2025, the projected completion date for the expansion.
2. Key Historical Financials
Tega has a healthy financial profile with a 3-year sales CAGR of 15% and a 3-year profit CAGR of 51%. The company has steadily improved its EBITDA margins from 11.6% in FY19 to 24% in FY21 as operating leverage kicked in. Margins took a dip in FY22 due to a continuous rise in input cost and a steep hike in the freight cost
Tega has maintained a healthy financial leverage ratio as net debt to equity has fallen from 0.6X in FY2019 to 0.3X in FY2022. The company has gradually reduced its interest expense and increased its interest coverage ratio from 4X to 10x from FY19 to FY22
Company has maintained its working capital cycle at 150 days over the years, resulting in an improved ROCE (11% in FY19 to 26% in FY21). The working capital cycle elongated to 182 days in FY22 due to supply chain disruptions which caused ROCE to fall to 19%
Cash flow from operations has remained healthy except for FY22 where it faced working capital challenges. The average CFO/EBITDA from FY19-FY22 has been 71%.
3. What is my view on Company valuation?
Tega is trading at a TTM PE of 27x. The closest listed peer of Tega in the Indian markets is AIA Engineering which trades at a 10-year median PE of 28x. Hence, at the current levels, long-term investors should wait for some correction in the stock before entering this script to ensure a decent margin of safety.
While Dynaprime is expected to grow at a CAGR of 25-30% whereas the other segments are expected to grow at 15%. Accordingly, the overall sales CAGR will range around 17-18% over the medium-term horizon. Moreover, with the upcoming capex coming online over the next 2.5 years, Tega will have increased its capacity by 40%. EBITDA margins can be volatile in the near term but management expects them to remain stable at around 21-22% in the long term as 75% of Tega’s revenues come from the replacement market.
4. What are the risks to the investment analysis?
Risks to the analysis are:
85% of Tega’s revenues come from export markets which expose the company to geopolitical risks, FX fluctuation risks, and global supply chain disruption risks. Tega’s performance in Q1FY23 was a scenario when all of these risks played out simultaneously and PAT dropped by 53% QoQ.
A lot of Tega’s future potential rests on the growth of Dynaprime. If the product fails to find larger acceptance in the mining industry, there can be a derating of the company in the public market.
About the Author
I am an MBA grad from the Indian Institute of Management, Bangalore, and currently working as a corporate finance specialist in a technology-based startup. I have cleared all 3 levels of CFA, US. I am an avid reader of businesses and like to analyze emerging trends in various sectors and macro economy.
I have had no stock, option, or similar derivative position in any of the companies mentioned for the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.