Tega Industries IPO: Reasonable valuation

Tega Industries IPO: With the company being a dominant player in India and being well entrenched globally itself, it has an advantage as its products are part of regular consumption articles. The company is raising money to allow the private equity investor to exit. It is debt free and has been regularly expanding its capacity

Tega Industries Limited is tapping the capital markets with its offer for sale of 1,36,69,478 shares in a price band of Rs443-453. The issue would garner Rs619 crore at the top end of the band. The issue opens on Wednesday (December 1) and closes on Friday (December 3).

The company allotted 41,00,842 shares to 17 anchor investors comprising 25 entities. Domestic mutual funds (MFs) were allotted 25,77,661 shares to eight entities. This comprised 62.86 per cent of the anchor allocation.

The top allocation was made equally to two anchors, namely SBI Mutual Fund and Ashoka Fund who were allotted 5,73,936 shares or 14 per cent of the anchor allocation. This was followed by an identical 7.54 per cent or 3,09,045 shares to seven anchor investors. This effectively meant that the top-9 anchor investors were allotted 80.78 per cent of the anchor book.

The anchor book sends a very strong signal to investors and this is also borne out with the subscription level on the opening day of the issue. The issue is already oversubscribed with Retail portion subscribed 5.89 times and 7.38 lakh application received so far. Overall, the issue is subscribed 3.31 times.

The company is in the business of manufacturing critical to operate and recurring consumable products used in the mining industry. Tega is a sizable player in this field. It has products for the global mineral beneficiation, mining and bulk solids handling industry. The company began operations in India in 1978 with collaboration of Skega AB of Sweden. The company has three plants in India and three abroad in Australia, Chile and South Africa.

The advantage that Tega has is, it is immune from capex cycles and caters to the after-market spend which has recurring revenues. It makes products for metals such as iron ore, bauxite, gold, copper and many other minerals and metals.

The company reported revenues of Rs856.68 crore for the year ended March 21 which were higher than the previous year of Rs695.54 crore. The EBITDA margins were at 27.86 per cent against 16.86 per cent for the previous year. The Net Profit Margins were at 15.92 per cent against 9.42 per cent in the previous year.

The performance of the company has really improved significantly in the last few years and is poised to fare better as the size and scale continues to grow.

The company is debt free and has been able to integrate the three acquisitions it has done with itself. The collaboration it had with the Swedish company is no longer there as Sega was acquired by the leading player in this business.

The company has reported an EPS of Rs 20.48 on a fully diluted basis for the year ended March 2021. This EPS is up from Rs9.84 for the previous year. The PE multiple for the company at this EPS is 21.63-22.12. The nearest comparable for the company is a player known as AIA Engineering who makes similar equipment used by cement plants while Tega does this for the metals mining industry. The private equity (PE) investor Wagner is exiting the company after 10 years and would be making a return of 2.62 times. Considering the returns that one is seeing private equity players make and the way fortunes of the mining industry have changed, one believes the returns made by Wagner were sub-optimal or probably exiting a little too early.

The fortunes of the metal and mineral industry have been on an upswing and things have changed significantly post Covid-19. With the company being a dominant player in India and being well entrenched globally itself, it has an advantage as its products are part of regular consumption articles. The issue is at reasonable valuations and the company is raising money to allow the private equity investor to exit. It is debt free and has been regularly expanding its capacity. There is substantial activity in the grey market and the premium is in the region of 75 per cent of the issue price or higher, implying that there is money to be made if the individual is lucky to get allotment.

On the first day of subscription, the retail portion is already subscribed 5.89 times and there are 7.38 lakh applications. One should expect that there would be more than 25 lakh applications being received. Apply for sure-shot listing gains.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)