Smallcap stock Tarsons Products has been a major wealth destroyer in recent times. From its all-time high of ₹914.35, hit on September 12, 2022, the stock has lost 40 percent to currently trade around ₹549.
It has also shed almost 24 percent in the last 1 year and 21 percent in 2023 YTD, giving negative returns in 4 of the 6 months of the current calendar year. The stock tanked 14.3 percent and 10.4 percent in Feb and March but recovered a bit, up 6.2 percent in April. It has mostly been flat since then, down 1.2 percent in May and up 0.2 percent in June so far.
However, from its record low of ₹501.5, hit in March 2023, the stock has advanced around 10 percent.
The stock is trading 17 percent lower than its IPO price of ₹662. It was listed in November 2021 at ₹662 and is almost 20 percent below its listing price.
Despite the weak performance, brokerage house LKP Securities has initiated coverage on the stock with a 'buy' call and a target price of ₹770, indicating an upside of 40 percent.
The brokerage is bullish on the stock owing to a) broadening addressable market owing to strong domestic growth, b) market share gains amidst a rebound in its end-user markets, c) enhanced product mix post capex particularly in the fastest growing PCR/Cell culture segment, and d) pricing and distribution advantage over large MNCs players.
Tarsons Products Ltd (TPL) is a leader in India in the production and supply of laboratory plasticware with more than three decades of experience. TPL is engaged in the design, development, manufacturing, and marketing of consumables, reusables, and others (including benchtop equipment & instruments). Its products are used by key end-user markets like academic/research institutes, pharma companies/CROs, diagnostic players, etc. The company has a diversified product portfolio with over 1,700 SKUs across 300 products.
The company generated ₹93.5 crore (or 33 percent of total revenue) in FY23 from overseas markets, with the US and Europe accounting for the majority of sales. This represents a 12 percent CAGR in export revenue during the fiscal years FY19 to FY23 (Between FY19 and FY22 revenue CAGR was 19 percent), informed the brokerage.
Investment Rationale
Strong domestic presence: Currently, Tarsons holds a 12–14 percent market share of India’s entire labware market (and 22–25 percent in the targeted market), informed LKP, further adding that due to import substitution and high consumer demand for goods in the consumables category, the company has historically been expanding its market share in the domestic market. Future business growth is also anticipated by the corporation through a combination of the developed market ‘China +1’ approach and geographic expansion, noted the brokerage.
Eyeing robust growth in the export market: As of FY23, the ratio of revenue from both domestic and international markets is 67:33, compared to 73:27 in FY20, highlighted LKP. Since 2008, it has been present in the export markets, but during the past several years, the segment has been expanding substantially. Tarsons has grown its export revenues at a CAGR of 12.2 percent in the last 5 years. The US, EU, and South-East Asia are the company’s top export markets. With improved production capabilities, LKP expects Tarsons to have significant traction in the export market given that its products are at least 50 percent less expensive than those of its international competitors.
Glassware to plasticware shift: As per the brokerage, the Indian laboratory equipment market (only plastic ware) has grown at a CAGR of 10 percent in FY15-20 to ₹1,225 crore in FY20. Plastic ware has grown faster on account of it replacing glassware on account of: a) it being cheaper, b) unbreakable and hence safer to use for lab personnel, c) better reusability, d) the issue of leaching of inorganic ions into aqueous solutions kept in glass, it pointed out. Plastic ware products which used to account for 46 percent of the overall industry in 2015 are already at 52 percent of the industry in 2020 and are expected to reach 67 percent by 2025 due to value migration and increasing use of disposable consumables which will be a positive for Tarsons, said LKP.
Capacity expansion: According to LKP, Tarsons operates five manufacturing facilities spread over 21,000 sq m in West Bengal and is expanding its manufacturing capacity for both existing and new products in a phased manner by setting up a new manufacturing facility at Panchla, West Bengal. With this, the brokerage noted that the manufacturing land area would increase to over 66,000 sq m (2x of its current capacity).
Subsequently, it pointed out that Tarsons would be able to cater to strong demand from both export and domestic markets and foray into the PCR and cell culture space and this would raise the target addressable market to ₹2,650 crore by FY25. The company aims to fully commission the Panchla facility by H1FY24; furthermore, it also plans to set up a new facility at Amta, West Bengal, for backward integration of in-house sterilisation by H1FY24 and a new fulfillment center to coordinate and expand warehouse operations also on track, informed LKP. Additionally, the upcoming sterilization facility at Amta should give the company an inherent advantage for PCR/Cell culture offerings which is the fastest growing market globally, it added.
Consistent performer: The brokerage highlighted that Tarsons' consistency is reflected in its strong financials and ability to maintain high margins even during tough times. Its Revenue/PAT grew at 13 percent/57 percent CAGR between FY14 and FY23 and the company has clocked an average Gross/EBITDA margin of 74 percent/44 percent respectively between FY18 and FY23, observed LKP. Amid global as well as domestic slowdown in the underlying sector, Tarsons continued to protect its margins on the back of growth in its conventional businesses, strong brand recall value, and pan-India distribution network, it added.
Estimates
With strong growth and capex ( ₹190 crore in FY23), LKP expects a significant improvement in its ROCE and ROE as the company ramps up its capacities.
With current RoCE/RoE of 15.3 percent/14.2 percent in FY23, it is anticipated the same to increase to 19.8 percent/17.4 percent respectively by FY25E.
Further, the company’s asset turnover will continue to remain low at around 0.8x by FY25E as it aims to double its gross block by FY25E vs FY22, it noted.
At full capacity the new plant is expected to generate revenue of ₹500 crore, as a result, along with improvement in return ratios, LKP expects Tarsons' revenue/EBITDA/PAT to grow at 25.9 percent/28.6 percent/32.3 percent CAGR over FY23-25E with gross/EBITDA/PAT margins gradually improving to 79.2 percent/47.8 percent/31.5 percent by FY25E.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
