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Tega Industries IPO: Why is it commanding strong grey market premium?​

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The initial public offering has broken records of achieving the highest subscription from qualified institutional buyers (QIB) category in the last decade.

Tega Industries, which is a leading manufacturer and distributor of specialized ‘critical to operate’ and recurring consumable products for the global mineral beneficiation, mining and bulk solids handling industry had launched its first ever IPO on December 01 which closed on December 03.

The IPO, during its subscription period, seems to have got all the right ingredients for a bumper listing on December 13.

Subscription record

The initial public offering has broken records of achieving the highest subscription from qualified institutional buyers (QIB) category in the last decade. On December 03 which was the last day of subscription, the QIB portion was subscribed 215.5 times. Overall, the issue was oversubscribed by 219.0 times.

It may be noted that the previous highest subscription for QIB portion was achieved by HDFC Asset Management Company Ltd which got 192.3 times subscription from QIB investors for its IPO that was launched from 25th – 27th July, 2018.

This was followed by Indigo Paints at 189.6 times and , Tatva Chintan which got 185.2 times subscription for its QIB portion.

Strong response to QIB category indicates that investors are willing to put their good money in quality IPOs and as per the market experts, QIBs are evincing interest in new businesses where there are few or no companies that are listed.

To be sure, the Bids had come in for 209.36 crore equity shares against an offer size of 95.68 lakh in the QIB category.

The IPO has seen strong demand for all investors. The retail portion has been subscribed 29.4 times and the portion for non-institutional investors was subscribed 666.2 times.

The primary offer of the company was entirely an offer for sale (OFS) of 1.37 crore equity shares offloaded by the company’s existing shareholders and promoters. The price band fixed for the offer was fixed at Rs 443-453 per share.

On November 30, the company had already mopped up Rs 186 crore from 14 anchor investors, who were allotted 41.0 Lakh equity shares at the upper price band of Rs 453 per share.

Mill-Liner Market

Globally on the basis of revenues, the company is the second-largest producer of polymer-based mill liners as of June 30, 2021. To be sure, mill liners are part of recurring consumables in global mineral beneficiation, mining and bulk solids handling industry.

75% of the total demand for mill liners came from copper and gold mining during 2020 while 25% came from iron ore, cement and other aggregates.

In the year 2020, the global mill liner market was estimated at USD 1.73 billion with demand skewed majorly in favor of replacement for existing grinding machines compared to that for fixing in new grinding machine. The ratio is expected to be about 70-80% from replacement and 20-30% are in the new installed machines.

Strong Grey Market Premium

The offer is commanding a strong premium of Rs 410 per share in the grey market and the reason for such a high premium is fundamentally strong business.

Ujjawal Kumar, Research Analyst, Green Portfolio attributes the high grey market premium to the fact that, “the company makes specialized critical products with high barriers to replacement or substitution

and is insulated from mining capex cycles as its products cater to after-market spends, providing recurring revenues”.

The company’s long standing relationship with marquee global customers supported by global manufacturing & sales capabilities puts it in good stead compared to its competitors which has helped improve the margin profile and ROCE consistently over the last couple of years, he added.

Prashanth Tapse, VP Research, Mehta Equities concurred with Kumar, saying that, “We like the recurring revenues business model as Tega products cater to the after-market spend of a mining processing unit resulting in repeat orders of spares which is typically 3 times of the upfront capex spend over the lifecycle of a mill”.

On valuations aspect, at upper price band (Rs 453/-), the issue seems to be reasonably priced and well in line with listed peer and we believe there is still something is left on the table for new investors, Tapse added.

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The company has a strong rationale for investment because of debt free books, robust free cash flows and growth prospects. Hence it commands a strong premium in the grey market.

Manoj Dalmia Founder & Director, Proficient Equities Limited, attributes the high grey market premium to, “Strong NII and QIB portion coupled with positive market sentiment and attractive valuation compared to its peer”.He expects the stock to list in the region of Rs 853-863 per share resulting in the listing gains of nearly 90% - 100%.

“Investors can hold onto the issue and expect the price to increase further”, Dalmia advised.