TEGA — earnings call

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Prepared remarks

INDUSTRIES LIMITED · MR. KAUSHAL SUREKA – DEPUTY GENERAL

MR. SYED YAVER IMAM – DIRECTOR, GLOBAL PROJECT MANAGER AND HEAD OF SALES – TEGA

MR. KAUSHAL SUREKA – DEPUTY GENERAL MANAGER, FINANCE AND ACCOUNTS – TEGA

Moderator · Conference Operator

MR. NACHIKET KALE – ORIENT CAPITAL Tega Industries Limited May 30, 2023

Ladies and gentlemen, good day and welcome to the Tega Industries Limited Q4 and FY’23

Questions and answers

Moderator · Conference Operator

Thank you very much.

The first question is from the line of Mohit Kumar from ICICI Securities.

Please go ahead.

Mohit Kumar

Good evening, sir.

Congratulations on a very good quarter and a fiscal year.

My first question is, is it possible to break up the volume and value growth for the Q4 as well as for the entire year?

Kaushal Sureka

The volume growth, we had also given a direction till nine months.

The volume growth remains in the range of 16% to 17% for the whole of the year.

And we are tracking the same kind of a range in this quarter as well.

And the price increase is in the range of 5% to 6%.

And there is a bit of a foreign exchange gain also on account of currency improvement.

So that's in the range of 1%.

Tega Industries Limited May 30, 2023

Mohit Kumar

My second question is, can you just break up the revenue between DynaPrime and non- DynaPrime business?

Kaushal Sureka

So, Mohit, this is a bit strategic.

And we would refrain from giving specific information breaking DynaPrime and mill business because that's something which we are now noticing is becoming a little difficult for us to share this information because as a strategic information, we will prefer to share the information at the overall business level maybe, but not split into DynaPrime and the traditional liners.

Mohit Kumar

Is it possible to share this with Chile, Australia breakup or do you think it's...

Kaushal Sureka

Not really.

You can see the segmental breakdowns as part of the annual report when it goes in terms of the geography wise revenue.

Mohit Kumar

I will do that, sir.

My last question is, sir, what kind of synergy is expected from the acquisition of the McNally Sayaji Engineering and what are your plans to scale up this business over, let's say, medium term, three to five years?

Kaushal Sureka

See, McNally Sayaji was an operational company and it is, kind of a backward integration for us because they are in an equipment space and we provide spares which are getting installed into those equipment’s as well.

So, this opens up a new market domain for Tega as well as they are not into the equipment space and the size of the market in the equipment space is pretty big as compared to the spare businesses.

So, McNally will open up that market from the equipment side and from a Tega perspective, this will also add value because we will have more installed equipment bases of our own group companies, which will add an advantage to us.

Mohit Kumar

Is it possible to take this business international?

Kaushal Sureka

Sorry.

Mohit Kumar

Is it possible to sell the equipment to Chile and the other markets, Australia, etc.?

Kaushal Sureka

Tega has been a global company and we export 80%-85% of our business in the foreign geography.

So, McNally also, as and when the product portfolio matures, we will definitely take that company also to the global market and it is very much possible that we take to the export markets.

Mohit Kumar

Understood.

Thank you and all the best.

Thank you.

Moderator · Conference Operator

Thank you.

The next question is from the line of Dhiral from Philip capital PCG.

Please go ahead.

Dhiral

Good evening, sir.

Thanks for the opportunity and congratulations for the very strong set of numbers.

If I look at your FY’23 gross margins and if I compare it with the FY’22, sir, our gross margins are down almost 100 bps-110 bps. Wherein this year we have seen everything, cooling off from commodity to shipping and everything, but our margins have fallen on a YOY basis.

Is there any particular reason for that, sir?

Tega Industries Limited May 30, 2023

Kaushal Sureka

So Dhiral, if you have heard our previous earnings call, it typically takes us two quarters to pass on the benefits or even the increase in the prices to our customers.

So, it is a little lag which happens.

So, you are right that it is showing a dip in terms of the overall margin, but if you see on a quarter-on-quarter basis, we are improving and that is how the increased price is getting transferred to the customers.

So, in the coming quarters, if this remains the situation, you might see a margin improvement as well.

Dhiral

So, we still are targeting a 60% gross margin in our business or with the acquisition of the McNally Engineering, we are targeting even higher gross margins, sir?

Kaushal Sureka

No, equipment business will not have a higher gross margin than our regular business.

That’s not something which is possible and sustainable in this space.

If you look at the merged entity level, our margins will probably dip as a percentage from here on because equipment business will have a lower margin definitely.

Dhiral

So, what will be our guided range for FY’24-FY’25 sir along with this acquisition now?

Kaushal Sureka

A bit too early to answer this question, Dhiral, because it’s just been two or three months we are into this company, and it will take some time for us to give any kind of a guidance to the market till the time we exactly assess the situations.

Dhiral

Okay, and sir, when I look at our gross block for FY’23 or maybe the net block, it has risen substantially from INR170 crores to almost INR308 crores.

So how much of that is of the standalone Tega or maybe overall Tega and how much of that of the McNally engineering, sir?

Kaushal Sureka

So, most of it is from McNally Sayaji with the new acquisitions is coming with a gross block of around INR170 odd crores at a fair valued level.

Dhiral

Okay, okay.

And sir, can you just quantify what was the overall growth of DynaPrime that we have seen in FY’23 as a whole or maybe the overall mill liner growth and the non-mill liner growth?

Kaushal Sureka

So, on a DynaPrime, as we already mentioned, Dhiral will not be answering specific questions on DynaPrime because that's a strategic product and we will not be sharing those information going forward.

But on an overall mill liner basis, we have grown in the range of 20%-22%, which is the 70%-75% of our business.

So, on an overall business basis, we have grown to 23%.

So, I think that answers your question that mill happens to be 70% of our business.

So, the majority growth comes from the mill business only.

Dhiral

And on the non-mill liner part, how much that has it grown?

Because this year we have seen a very good growth as of nine months.

So, what was the overall growth for FY’23, sir?

Kaushal Sureka

So, if you talk about overall growth, we are 24%.

Mill liner has grown in the range of 20%-21%.

So non-mill is in a bit of a higher range, but not crossing 30%.

It will be in the range of 25%- 26%.

Tega Industries Limited May 30, 2023

Dhiral

Okay.

And so, this acquisition of McNally Engineering, so does it help only for the backward integration part or is there any revenue benefit that will flow to the P&L, sir, in FY’24?

Kaushal Sureka

Sorry, I did not understand your question.

Dhiral

So, the acquisition of McNally Engineering, does it help only on the backward integration part or it will help in generating the revenue as it will expand our product basket, sir?

Kaushal Sureka

See, McNally Sayaji will definitely add in both the spaces.

It also helps increase Tega's revenue because we will have more known installed bases wherein McNally's equipment will be installed.

So, we will be able to push our products also faster there because it is coming from the same brand.

And McNally and equipment space will also give us new geographies and new market also.

So as a group, we will have equipment business coming in plus the spare business will get a boost because of our own equipment getting installed at the customer sites.

Dhiral

So, what kind of revenue, sir, we are looking on the McNally Sayaji part, FY’24 and FY’25?

Kaushal Sureka

See, at the time of acquisition in the press release, we have mentioned that we are looking in the range of CAGR growth of 15% for this business.

They have done in the range of 12%-15% in the last two years since they went into NCLT and we believe that in the initial first two years, we will be able to higher up it by at least 2% or 3% and 15% is a reasonable number which we should be able to achieve for the next three to four years on a CAGR basis.

Moderator · Conference Operator

Thank you.

So, Dhiral we request that you return to the question queue for follow-up questions.

We will take the next question from the line of Sandeep Tulsiyan from JM Financial.

Please go ahead.

Sandeep Tulsiyan

Yes, hi.

Good evening and congratulations on this fantastic set of numbers.

I have just one question regarding McNally Sayaji.

I think the equipment phase that we have reported seems to have very high EBIT margins in the reported numbers.

So, should one look at these margins to be sustainable going forward as well or it has to be looked after eliminating the interest payment amount as well that it shows over there?

Kaushal Sureka

So, Sandeep, to answer your question, we have consolidated the best part of McNally's business into our financials, which is the last five weeks of the year.

So, if you look at the business lumpiness, that's the best period for any company to book revenues, right?

So that is what's getting consolidated.

So, you are right, these numbers are showing a healthy EBIT, but that's not sustainable as a percentage of revenue.

We might track, as I mentioned, that a 15% CAGR on the revenue, but the margin levels will not be a percentage of what is right now getting consolidated with Tega.

They will have a lower EBITDA margin and the lower gross margins as compared to Tega's business because the nature of the business is such.

Sandeep Tulsiyan

Right.

So, see, when we compare other peers in this space, typically margins are, I mean, of course, they are all over the place, but it's deviated 10% plus minus maybe 2% to 3% over there.

So, should we consider a similar range, or the product portfolio and competitive intensity is Tega Industries Limited May 30, 2023 different where margin should be outside this range is a good guide where they should be going forward as well.

Kaushal Sureka

Sandeep, we would love to answer this question maybe from Q2 onwards, once we get a good sight of the business, more close sight of the business to give a better guidance to the market on this.

Right now, I think it will be very premature for us to give any kind of a commitment or directions to the market on this.

Sandeep Tulsiyan

Fair enough.

And also from a capital allocation perspective, just want to understand what is the kind of capex we have planned in this entity?

And are there any other product gaps which we are looking to address through future acquisitions?

Because the cash will continue being very strong?

Kaushal Sureka

So, from a capex perspective, as part of our resolution plan, we said that we might infuse around INR10 crores-INR15 crores into the company based on the needs at each of the locations.

From a product gap perspective, this adds a significant amount of a product portfolio in our whole scheme of things.

The next round of capex, the next round of acquisition is something which I will not be able to comment right now, but as you all know, that Chile, we are coming up with a greenfield project, so there is enough amount of capex plans which is on the plate.

And the capital allocation for the next one, one and a half years will be towards Chile and some bit of capex in geographies like Africa and in India.

Sandeep Tulsiyan

Fair enough.

Thank you so much for taking these questions.

Kaushal Sureka

Thanks.

Moderator · Conference Operator

Thank you.

The next question is from the line of Sahil Sanghvi from Monarch Network Capital.

Please go ahead.

Sahil Sanghvi

Good evening.

Thank you for the opportunity and congratulations for an excellent set of numbers.

My first question is, can you give me the breakup of what were the revenues from McNally Sayaji and Q4, I mean out of the INR396 crores, what was the revenue contribution from McNally?

Kaushal Sureka

So, if I could just put you just a brief number, the total revenue from McNally Sayaji, which is getting consolidated for the five weeks is in the range of INR35 crores.

Sahil Sanghvi

INR35 crores.

Okay.

Kaushal Sureka

So, it is for the period from 24th February till 31st March.

Sahil Sanghvi

And what's the FY’23 revenues that McNally Sayaji has done?

Kaushal Sureka

So, as a company, they have done close to INR190 crores for the full year.

Sahil Sanghvi

So, this, I mean, this is different from the entity we have acquired.

Tega Industries Limited May 30, 2023

Kaushal Sureka

Sorry?

Sahil Sanghvi

This is different from the entity that we have acquired, I mean the assets that we have acquired.

INR190 crores, is it fair to assume that the assets that we have acquired has done a INR190 crores?

Kaushal Sureka

190 was for full year and we have acquired this entity at the end of February.

So, we will be only consolidating that portion of revenue, which has accrued to them post our acquisition.

Sahil Sanghvi

I get it.

I get it.

My second question would be, if you can just give some more details on the capex that you want to do on the other business, as in the Tega side of the business.

I mean, how much you want to spend and on what aspects and as in location and what kind of growth capex are you spending on what front?

Kaushal Sureka

So, on a larger capex side, we already have plans for consolidating our operation and expanding capacity in Latin America, so which is a greenfield project in a way for us.

We do have a bit of an expansion project of adding some capacities in Africa and in India.

And with McNally Sayaji coming into our fold, we have allocated a portion of our capital to the tune of around INR15 odd crores to put into this business to meet up the product gap wherever we find that the market is ready to take our product and we can build up the capabilities faster.

Sahil Sanghvi

Yes, so just need clarification on the Latin America, Africa and India spend, I mean how much would that be and over what period?

Whatever it is?

Kaushal Sureka

So, overall project cost perspective, it is close to $20 million capex.

So, the land acquisition part is already done.

We are waiting for environmental clearances from the regulators and that will be, we expect that to happen by another maybe a quarter or two.

And once that is there, the project will be at full swing and then the spend will start happening and that is going to be funded through an optimal mix of debt and equity.

Sahil Sanghvi

This is across all the three locations, or this is just Latin America?

Kaushal Sureka

This is only for Chile.

The $20 million is only for the Latin America region.

Sahil Sanghvi

And the other two locations, would there be any significant?

Kaushal Sureka

Not a very significant amount, not as big as in Chile.

So, we will have around, initially we have said that for the next three years, we had a project of around overall $30 million. $20 million goes to Chile and then rest of the $10 million will be in Africa, India and now with McNally coming in, you can add $2 million more to that.

Sahil Sanghvi

And this $20 million for Latin America, would that all be spent in FY’24 or that will be spread over the next two years?

Kaushal Sureka

So, the idea is to spend it as soon as possible.

We are waiting for the environmental clearances because we are already short of capacity there with the kind of demands we are looking in.

So, the moment we get these environmental clearances, the project will be at full swing and we Tega Industries Limited May 30, 2023 expect that we will be able to spend most of it in ‘24.

There might be some spill over which might happen in ‘24-‘25, the initial first two quarters.

Sahil Sanghvi

Right.

And from the demand perspective, like how do you see the other business growing as in the Tega business growing for the next two, three years?

Kaushal Sureka

So, we have always mentioned that we target and aspire to grow at a 15% growth rate, and we have been doing it for the last five years now.

So, we will be keeping the same track and we will be targeting that number as well.

Moderator · Conference Operator

Thank you.

The next question is from the line of Sandeep Jain from Baroda BNP Paribas Mutual Fund.

Please go ahead.

Sandeep Jain

Thanks for taking my question.

So, first, if I can understand, I mentioned INR190 crores of McNally Sayaji revenue for FY’23 what amount of EBITDA they have made?

Can you disclose?

Kaushal Sureka

See, that does not make much of a sense for us because the major part of that revenue was generated when we were not part of that company.

So, we acquired this company only in the last 24th February, which is like five weeks.

So, I think we should be looking into their future prospects more than what they have done in the past.

So, we will track a revenue growth of close to 15% EBITDA margins we need to revisit and only once we get a better side on this, we will be able to give you that number.

Sandeep Jain

No, I am just trying to understand whether there is some kind of operating leverage can be achieved or some kind of low hanging fruit is there.

I understand it is not kind of comparable, but just wanted to understand the numbers.

Kaushal Sureka

Even during this CIRP period, they have reported profits.

So, that is something which you can consider as an upside for them.

Yes, they did not have a debt on their balance sheet.

So that makes it all the more reason for them to report profits.

But going forward, as I said that we have to wait and watch till another one or two quarters.

Sandeep Jain

Got it.

And second, if I can understand, so somewhere around INR250 crores to INR260 crores we are going to spend in next three years, right?

So, I can get 32, 33 million kinds of thing, right?

And currently, if I look at the way the debt is there, so any kind of peak debt are we, in our mind and we want to reduce the debt position going ahead?

Kaushal Sureka

So, our present debt-equity ratio is in 0.3 and our net debt positions after this acquisition remains at INR70 crores.

At the debt level.

Our EBITDA for this year is close to INR260 crores, which is four times the debt.

So, we are at a very healthy position in terms of the debt.

So, any new capex can very well be funded through an optimal mix of debt and equity.

We can even think of funding entirely through internal accruals as well, because the amount of cash sitting in the balance sheet will permit us.

That is something which as and when we have to spend, we have to look at the market and take a conscious call.

Tega Industries Limited May 30, 2023

Sandeep Jain

Got it.

And all the new capacity or all the new capex which we are doing, we are doing on DynaPrime, or we are doing on other products and what would be the total nameplate capacity after that?

Kaushal Sureka

Our capacities are very much fungible, right?

So, it's not that when we add capacity, it can only cater to DynaPrime, or it can only cater to mill.

It's largely fungible, so any capacity addition can serve that particular market for those kind of products.

So, it's an overall basis capacity.

It's not for a particular product level.

Sandeep Jain

Okay.

Just one last question.

Some time back, we have got the news that Chile and some other geographies are nationalizing all mines.

So, any kind of impact on us on that news and or I am just, theoretically or hypothetically any kind of issues on that?

Syed Imam

No. Chile had a political, this is Syed Imam here.

Chile had a political change with the Left coming in heavily in power, last year.

The new constitution, the Left had proposed some of the things, one of the biggest copper mines over there, Codelco is already government owned.

But at the same time, now what has happened in the last four months, there has been a very large change again in the political situation over there.

So, some of these issues which had cropped up here before last, I don't think it's going to get implemented fully.

And private companies have been very large in Chile.

Even for government company, we are in the space of consumables.

And if the mines are operating, we need, they need that.

So, for us, although we are there in Chile with both government space, which is Codelco, we are also there with the private Chile.

Chile being 40% of the total copper production in the world, I think going forward, any government will be very difficult to change drastically over there.

So based on latest development, we think things will continue as it is.

Sandeep Jain

Got it.

And just, kind of data keeping.

So Codelco growth, that is the government mine in Chile, is more or less the same compared to the private mining growth or they are working at a different scale?

Syed Imam

No, as far as growth is concerned, I think both the mining and the Codelco as well as the private sectors are all working in the same kind of space, because they have to continue to cater to the larger demand of copper that is going to come up with the EV sales.

So, I think everyone is tuned into how to add capacity, how to increase productivity.

Sandeep Jain

Got it.

Thank you, sir.

That's it from my side.

Moderator · Conference Operator

Thank you.

The next question is from the line of Mihir from Carnelian Capital.

Please go ahead.

Mihir

Yes, hi.

Thanks for giving the opportunity and congratulations on a great set of numbers.

So, you mentioned about the $30 million capex.

I just largely wanted to understand on the operational numbers front, what kind of capacity addition are you looking at Chile and India?

I mean, in operational terms, if you can clarify, that will be really helpful.

And my second question Tega Industries Limited May 30, 2023 was on the right to win.

I mean, when we see other companies, they are also present in the overall business services.

So, what is the differentiated right to win that we are having specifically with reference to DynaPrime product, which is giving such a good growth?

And despite the fact that we are operating only in the mill liner business, versus those companies also having their own mills?

So that will be really helpful.

Mehul Mohanka

Can you just once again repeat your question?

Mihir

Yes, sure.

So, my second question was on the fact that there are global companies which are also operating in the overall mills business, but since we are primarily operating in the mill liner business, so despite we are operating in the lesser smaller part of the segment, so what is the differentiation of right to win that we are having?

Then we are able to win contracts, have good revenue growth, despite operating in just the mill liner segment and not the entire mill.

Mehul Mohanka

So, if I can answer that, this is Mehul.

If you look at our entire historical growth, the reason why we have continued to deliver growth in mill lining segment is because we have very clearly been able to differentiate ourselves from the other competitors or other companies which supply both mill and linings or just the mill.

So, there is a clear distinction that the customer makes in his mind when he sees a proposal from us because we deliver value in terms of both engineering and performance.

So that’s how we differentiate ourselves and now having bought McNally which manufactures grinding mill itself, that’s where the integration or the backward integration and the opportunity to now combine our linings with the mill also presents itself as a future growth opportunity.

Mihir

Sure, sure.

And just on the capex side, I mean, you mentioned about contingent values.

Moderator · Conference Operator

This is the operator.

Sir, please use the handset mode.

The audio is not clear.

Mihir

Yes, sure.

So just on the capex side, I mean, the $30 million number you mentioned, if you can clarify what in terms of addition, I mean, operational terms, what in terms of million terms per annum are we looking to add at Chile and Dahej from this $30 million, that will be really helpful.

Kaushal Sureka

So, from the capacity in Chile, we will be able to generate our revenue levels at a peak level by FY’30 in the range of $70 million to $80 million from here on.

So, it will kind of double the revenue from present level in the next five to six years with this capacity.

And for Dahej also, this will add at least 7% to 8% on our top line once this spent is done in Dahej and in South Africa.

Mihir

Sure, sure.

That's it for my side.

Thank you very much.

Moderator · Conference Operator

Thank you.

The next question is from the line of Shirom Kapoor from Prabhudas Lilladher.

Please go ahead.

Tega Industries Limited May 30, 2023

Shirom Kapoor

Hi.

Thanks for the opportunity.

Could you help us with utilization levels at each plant for FY’22 as well as FY’23?

Kaushal Sureka

See, capacity utilization, as I mentioned, we are not a kind of a commodity or a grinding media wherein we can say tonnage is our capacity.

But on an overall revenue basis, we see that we are right now operating in the range of around 60% from our overall capacity utilization.

And it is largely same across location.

Yes, in Chile, we are higher capacity utilization.

That is why we are topping up the capacity.

And creating more and more capabilities in Chile.

So, there we are at higher capacity utilization, which is calling for a capex to be spent in the next two years.

But on an overall company level, we are at 60%.

Shirom Kapoor

Okay, understood.

And similarly, now for the new acquisition MSEL, you guided for 15% growth going forward.

So that would be on the INR190 crores.

This is 100% acquisition, right?

So, the INR190 crores, which they did in FY’23, you are projecting for 15% CAGR on that for the next few years.

Is that correct?

Kaushal Sureka

Yes, you are correct.

Shirom Kapoor

And I might have missed this earlier, but is there any margin guidance that you can give us on the new subsidiaries going forward, which they can achieve?

Kaushal Sureka

Not now, maybe one or two more quarters from here on.

Shirom Kapoor

Okay, understood.

Thank you.

That is all from my end.

Thank you so much.

Kaushal Sureka

Thank you.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, in the interest of time, that was the last question.

I now hand the conference over to the management for closing comments.

Kaushal Sureka

Thank you to all the participants for attending this call and asking us questions, which also allow us to introspect further and help you clarify your doubts around our business.

And we are happy to handle this query in the upcoming earnings call for the coming quarters.

Thank you.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, on behalf of Tega Industries Limited, that concludes this conference call.

Thank you for joining us.

And you may now disconnect your lines.