Tega Industries

On steady growth path

14 November 2022

Tega Industries reported beat on our estimates in 2QFY23. Net sales were 5% above estimates (INR
2.8bn; +19.7% YoY), while EBITDA was also 5% above estimates (INR541mn; +37.5% YoY), as EBITDA
margins expanded by 250bps YoY to 19.6% (JMFe: 19.5%, 2Q23: 17.1%). PAT grew by 56.8% YoY to
INR354 mn (13% above estimate). For FY23, management reiterated its margin guidance of 21-23%
with gross margins at 60%, given a) strong trajectory of volume growth in 2H, b) near completion of
price hike cycle and c) peak freight costs already behind as it has already recovered 75bps of the
150bps negative impact. We maintain our positive stance on Tega on a) higher penetration
opportunity for Dynaprime liners (addressable market at USD 900mn), to deliver 25-30% CAGR over
FY22-25E, b) cross selling opportunities of other products to aid in outpacing the industry growth, c)
green field expansion in Chile to increase growth opportunity in LATAM (increase capacity by 3x with
USD 70 mn revenue target) and d) sustainable EBITDA margins at 21-23% due to operating leverage.
We maintain BUY with a revised TP of INR700, valuing the stock at 22x Mar’25E EPS (10% discount to
AIA Engineering), as we roll forward by 6 months.

• Robust volumes drives growth: Net sales stood at INR2.8bn (+20% YoY) led by 18%
volume growth, 2% price hike and nil forex translation impact. Dynamprime liners, being
lumpy in nature, clocked growth of just 1-2% YoY to INR700mn and traditional mill liners
recorded growth of 9%YoY to INR1.13bn. Non mill liner revenue growth improved by
60% YoY to INR800mn as Australia sales picked up on easing Covid restrictions.
Geography wise growth: South America +31% YoY, Africa +14% YoY, Eumar (Europe, ME
and Russia) +80% YoY, Asia Pac +43%, India +37% and North America -7%.
• Relief in logistic cost supports margins: Gross margins remained stable YoY, but were
down sequentially due to change in sales mix (lower sales in North America), which
should normalise in coming quarters. Price pass through and lower freight costs helped
sustain EBITDA margins sequentially at 19.6% (+250bps YoY), even as sales mix
deteriorated. As on date, margins have gained 75bps benefit of lower freight rates, while
management believes balance 75 bps will be recovered in next 2 quarters. Management
expects to maintain EBITDA margins of 21-23%, given continuity in volume growth
trajectory coupled with further reduction in logistic costs.  Capacity expansion plans on
track: The company intends to spend INR2.5bn in capex in next three years, where
majority of the capex would be spent in next 2 years and balance in last year. The
company incurred capex of INR570mn in 1HFY23 and expects to spend another INR150-
200mn in 2H. The company maintained its guidance of doubling capacity in 3-4 years
and will ramp up Chile plant in FY24 and FY25.
• Maintain BUY with revised TP of INR 700: We forecast sales/EPS CAGR of 16%/25% over
FY22-25E, as we expect penetration in its Dynaprime range to drive growth and expect
margins to improve to 21-23% by FY24-25 (vs 19.2% in FY22). Maintain BUY with revised
TP of INR700, based on 22x Mar’25E EPS (10% discount to AIA Engineering), as we roll
forward by 6 months. Key risks: sharp decline in global mining capex.