In our story, Tega Industries IPO: Information analysis, we shed light on the key details of the IPO, along with important information about the company. Here we will answer some questions about Tega Industries and evaluate it on parameters like management, financials, valuations, etc.
1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
Yes. In FY21, the company's earnings before tax stood at Rs 181.2 crore.
2) Will the company be able to scale up its business?
Yes. Its overall capacity utilisation for FY21 was around 58 per cent, leaving a lot of room for growth. An increase in demand due to declining ore grades, coupled with the company's plan to increase its penetration and market share through its direct sales model and strong research and development capabilities, would help it in the future.
3) Does the company have recognisable brands truly valued by its customers?
No. The company is involved in the B2B supply of mill consumables.
4) Does the company have high repeat customer usage?
Yes. Its revenue from repeat orders of sales as a percentage of the sales of products and services averaged 76.5 per cent during FY19-21.
5) Does the company have a credible moat?
No. While the company operates in a market structure that is dominated by a handful of companies, the company doesn't seem to have a credible moat.
6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes. The company is sufficiently robust to major regulatory or geopolitical risks.
7) Is the business of the company immune from easy replication by new players?
Yes. The industry presents significant entry barriers in the forms of capital intensity, customer validation and approvals, expectation from customers with regard to product innovation, high-quality standards and stringent specifications. Moreover, mineral-processing sites do not tend to switch to cheaper suppliers immediately, owing to high switching costs.
8) Is the company's product able to withstand being easily substituted or outdated?
Yes. The company's products play a critical role in any mines' processing operations.
9) Are the customers of the company devoid of significant bargaining power?
Yes. The customers of the company are devoid of significant bargaining power, as the products, due to their critical nature, have high switching costs. The company is able to make long-term contracts and pass the increase in input costs to the customer.
10) Are the suppliers of the company devoid of significant bargaining power?
No. The company's predominant raw material is rubber of different kinds. As the company is dependent on a few key suppliers for its raw materials, the company is a price taker.
11) Is the level of competition the company faces relatively low?
No. The company faces competition in India as well as overseas. The industry is dominated by a few players globally. For instance, in the mill-liner product segment, the top five players accounted for 49 per cent of the market in the calendar year 2020. Moreover, Tega Industries compete with global players that are larger enterprises with greater financial resources.
12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about a 79.2 per cent stake in the company.
13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. Chairman and executive director Madan Mohan Mohanka (one of the promoters) has been associated with the company since its incorporation in 1976.
14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.
15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes, the company is free from any material litigation.
16) Is the company's accounting policy stable?
Yes. As per the auditors' report, the accounting policy is stable.
17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free of any pledging.
18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital employed of more than 18 per cent?
No, the company managed to generate a three-year (FY19-21) average return on equity of 14.8 per cent and a return on capital employed of 15.7 per cent. For FY21, the company generated a return on equity of 22.2 per cent and a return on capital employed of 24.8 per cent.
19) Was the company's operating cash flow positive during the last three years?
Yes, the company has reported positive operating cash flow during the last three years.
20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
Yes. The company's revenue increased from Rs 633.8 crore in FY19 to Rs 805.5 crore in FY21 at a CAGR of 12.7 per cent.
21) Is the company's net debt-to-equity ratio less than one or is its interest-coverage ratio more than two?
Yes. The company's net debt-to-equity ratio stood at 0.19 as on June 30, 2021 and its interest-coverage ratio was 10.75 for FY21.
22) Is the company free from reliance on huge working capital for day-to-day affairs?
No. A significant amount of working capital is required to purchase materials and manufacture the finished products before the payment is received from customers. The company had a working-capital cycle of 120 days in FY21.
23) Can the company run its business without relying on external funding in the next three years?
No. The company plans to expand its manufacturing capacity in India and overseas and explore inorganic growth opportunities. These are highly capital-intensive activities and therefore, the company may have to rely on external funding.
24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. Short-term borrowings decreased from Rs 153 crore in FY19 to Rs 103 crore on June 30, 2021.
25) Is the company free from meaningful contingent liabilities?
Yes, the company does not have any meaningful contingent liabilities.
26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, the stock will only offer an operating-earnings yield of 4.7 per cent on its enterprise value.
27) Is the stock's price-to-earnings less than its peers' median level?
Yes. There is only one listed peer. Post-IPO, the company's stock will trade at a P/E of around 22.5, which is less than its peer's P/E of 30.0.
28) Is the stock's price-to-book value less than its peers' average level?
No. There is only one listed peer. Post-IPO, the company's stock will trade at a P/B of around 4.8, which is more than its peer's P/B of 3.9.
Also read about Tega Industries IPO: Information analysis to learn about key IPO details and important information about the company.
Disclaimer: The authors may be an applicant in this Initial Public Offering