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Tarson Products

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Brief Introduction

Tarsons Products Ltd. (TPL) is an Indian labware company engaged in the designing, development, manufacturing, and marketing of ‘consumables’, ‘reusables’, and ‘others’ including benchtop equipment, used in various laboratories across research organizations, academia institutes, pharmaceutical companies, Contract Research Organizations, Diagnostic companies, and hospitals. Tarson is one of the top three labware manufacturing companies in India and has a market share of 9-12% of the labware market in India. The company’s clientele includes Emami, Himalaya, HUL, Lupin, Mankind, Nestle, Patanjali, Sun Pharma, Anchor, etc.

Q3 FY23 Updates

Finacial results & highlights

Detailed Results:

  1. The company witnessed revenue degrowth of 13% YoY in consolidated terms in Q3.
  2. The profits for the company were down for Q3 with a rise of 25%.
  3. The EBITDA margins for Q3FY23 stood at 43.5% Vs 46.9%.
  4. Exports: Domestic stood at 66:34.

Investor Conference Call Highlights: 

  1.  The overall industry is slowing down on the back of current recessionary trends and aftereffects of the COVID pandemic. The company witnessed a slowdown across its end markets, including diagnostics, academia as well as research institutes. However, management expects this to be a temporary phenomenon.
  2. The revenue decreased owing to industry degrowth coupled with a higher base of the previous year because of covid related products.
  3. The outperformed industry growth in the current quarter.
  4. Margins decreased on account of a change in product mix as well as reverse operating leverage going out on account of a dip in revenues for the current quarter. They were also impacted on account of higher sales promotional, marketing, and travel expenses for their participation in various shows and exhibitions.
  5. The company’s new Panchla facility will enable it to serve a completely new segment of the plastic labware industry. While in Amta, West Bengal, it is expanding in some key products as well as building a fulfillment center to consolidate its warehouse operations into a single centralized unit to better manage its inventories and achieve cost synergies. It also aims to do backward integration in the same facility.
  6. The management believes that the Indian plastic labware market is at a very nascent stage with huge potential in the export markets.
  7. The company is less concerned about the demand slowdown’s impact on new capacity utilizations due to it being temporary in nature coupled with the majority of its expansion being for new products which it never made before as against products in which it is expanding capacities.
  8. The management states that the industry is saturated at this point with a lot of pent-up stock owing to the huge artificial demand led by COVID.
  9. The company sees sales of PET bottles get delayed till March of FY23 owing to large internal approvals requirements.
  10. The Panchla capex will be completed by May.
  11. The company’s capacities are not fungible & each is specialized for the production of a particular product only.
  12. The company normally expects capacity ramp-up to take 3-5 years depending on industry conditions.
  13. The company doesn’t have any orders for its new capacity since it will produce new products which will be needed to be marketed first to its customers for feedback.
  14. The company is seeing pressures in the diagnostics space owing to the entry of new entrants leading to price erosion for diagnostics cos & since the company doesn’t want to indulge in high-discount products, it is seeing volume degrowth.
  15. The company is refraining from giving any guidance owing to the volatile environment.
  16. The company’s export market strategy is to find agents & representatives while the company will continue to do biz from Kolkata.
  17. The company doesn’t cater to biotech and CRO because it doesn’t have a product line to approach them on a very large scale.
  18. The global market size for labware & related products which the company is addressing through its existing plus new products in the future is INR 50,000 Crs while the Indian market size is 1,200 Crs.
  19. The top 3 export customers contribute 40% of total export revenues.
  20. The Amta facility is currently under construction and should be completed by the month of July and August.
  21. In FY22, covid led products contributed about 15% of total revenues.
  22. The depreciation & the 500 Crs capex will hit the P&L numbers in the form of fixed costs in the coming quarter.

Analyst’s View:

The company had a tough quarter with revenues plunging by 15% owing to an industry-wide slowdown coupled with a higher base of the previous year because of covid led slowdown. Although the management believes that the current situation is an anomaly, the company is refraining from giving any guidance owing to the volatile environment. It remains to be seen how the company will increase its presence in the export market, tackle the slowdown in the end-user industry, deal with possible margin erosion, especially from the diagnostics segment & ramp up its new capacity considering the gloomy demand environment. However, due to its strong market positioning & industry growth tailwinds in the long term, Tarsons remains an interesting stock to keep on one’s watchlist.