TARSONS products ltd

Good results from Tarsons. Growth in Sales as well as profit on YoY as well as QoQ basis in current environment is really commendable…

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any particular reason for the cash conversion cycle to be so high ? or is it a some error.
on screener it shows cash conversion days to be 482 :thinking:

According to the Marcellus newsletter ,the company has to keep high inventory of imported granules(EU & USA) of medical-grade plastic because the business can’t operate in JIT mode . Even for 19 & 20 it was 400+ and I am assuming they hoarded some more as the war started in Feb.

Disc: Not invested .

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Q4 FY22 Concall Highlights

Estimate the size of the Indian plastic labware market at Rs. 1,200 crores and is growing at a range of 10%.

Company has 25% of market share for products in which they are present into.

Company has 140 distributors across India and 50 sales people.

45 distributors across globe for export business.

Export sales is 1/3rd of total sales.

Export sales consist of branded sales and ODM sales. Sales split between branded sales and ODM stood at 43:57 for FY22. ODM sales is the white label business of the company.

Working on expanding manufacturing capacities for both existing and new products in a phased manner through construction of a new manufacturing facility in Panchla, West Bengal. The project is on track and target to commission new facility by H1 FY24. The new facility will also manufacture bioprocess and cell culture products which have its own market size in India and abroad.

Expect to grow topline around 30% for at least next 3 to 5 years.

Expects margin to be at same level as FY22. For FY22 GP margin is 79% and OP margin is 51%.

The margin difference between the branded international business and the ODM international businesses is almost similar. The difference between the gross margin of the international business and the domestic business, the domestic business is slightly higher and the international business is slightly lower but overall, on the EBITDA levels, the business is almost equal because overhead costs in the domestic business are drastically higher than that of the international business.

Top 10 distributors account for 50% of business.

Aspiration of 500 crores sales by FY25. This implies revenue CAGR of around 20%.

In India the competition is not from China, it is more from Europe, the US as well as Indian players inside India. Internationally, there is a very strong competition from China especially from the top tier Chinese manufacturers. There are very, 2 or 3 very strong companies which manufacture a very high-quality level of products and we see increased acceptance and increased entry into larger accounts which were dominated by the Chinese because the Chinese +1 strategy coming into.

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Just saw, a thread on Tarsons, sharing few checks (3 months old). Posting here directly without checking the thread since next few days may have intermittent access to internet (apologies if some points are repeated already in above thread).

On Promoters : Very humble, grounded and very focussed. Sanjeev looks after production and Rohan has helped company get foothold in export market.

The culture is strong, where the Employees retention is very high. Mumbai Sales guy have been with company for very long (usually sales guys switch on better offers, they are on ground folks, who are easily accessible by competitors). They have started hiring from thermo, corning etc to expand sales team.

Company has policy of having limited distributors and make them large, some distributors do sales worth ~18/20 crores also which is close to 6% of company’s sales. Many Distributors are decade old.

As and when distributors reach maturity stage of sales, they need new products to grow or they will grow on back of our competitor products and hence they keep coming up with products (where competition is only from MNCs). Recently introduced PCR/Cell culture products.
PCR/Cell culture in bombay have been sent for approvals at leading diagnostic chains and have seen positive response and sure to get approvals.
PCR/Cell culture : Rs 500/600. Thermo Fisher 10-15% higher.

Tarsons products meet international standards. Tarsons in A to C, ThermoFisher only in A category products.
Thermo to reduce price gap : contract manufacturing in India. Now closer to Tarsons, not all products. Still tarsons is 10-15% lower.

In Equipment business, they are not aggressive hence it is small proportion of sales. Also they are not focussed they used to import now they have focussed on in-house and hence now if we give feedback they can work also. Earlier import from China.
They have one unique product magnetic stirrer, which capacity to handle Magnetic stirrer hot plate - 400 plus degrees versus 150 degrees of other players.
Tarsons life time warranty for equipments. No one gives this in market.

Growth will be from : They will grow wallet share, they are with all the top notch companies be it pharma/diagnostic/chemical companies and introduction of new products like PCR/Cell culture.

Pharma companies pricing is not criteria hence even if expensive, they will prefer quality,
1 batch goes wrong, millions of loss.
Tarsons is a blend of price + quality.
Hardly any product recalls in their products.

Competition : Tarsons faces competition from MNCs and other reputed domestic firms across its product categories.
Large domestic companies operating in the labware space include Tarsons, Abdos Life Sciences, Accumax lab devices, Remi and Borosil (Scientific products division). M
ajor MNCs supplying to the Indian market include Thermo Fisher, Becton Dickinson, Eppendorf and Corning.
Tarsons competitive advantage is the wide 1700 SKUs where you get everything at once place, not every company has inhouse capabilities to do this, since it does entail mould capex not many in this industry specially domestic guys have the BS strength. Consumers prefers all at one place

Request one to please not circulate check notes in any other Social media forums (WA, twitter etc), this person was reluctant to share these data and had shared in good faith and in confidence. I am sharing here for the benefit of VP community who has given me so much in stock picking.

Disc : Biased, accumulated at lower levels forms 6% of portfolio.

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I am trying to make sense of the projected revenue target of 500 crore by FY’25,
The management has said that there will be an organic revenue growth of 20% compounded for next three years, to achieve the number of 500 crore. Now with Panchla facility coming on stream in Aug 2023, at a capex of 300 crore( I am assuming 100 crore for Amta), and asset turns of 0.6/0.7x, shouldnt that add another 200 crore to the topline by FY’25? The revenues, then work out to be roughly around 700 crore. Can someone throw some light on these numbers, please?

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As per Q3FY22 concall, TPL mentioned 150-160 crs CAPEX for setting up infra at both Amta and Panchla. Assuming 200 crs for infra + machinery at both sites, if we take 0.6 asset turn for Panchla facility (taking it to be 125 crs), we get 75 crs.
The remaining CAPEX might be for expanding existing lines.

This additional revenue spurt may be due to stronger than anticipated growth and certain conservative estimates by company. Please correct me if I am wrong.

Disc. - Invested

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Your estimates seem correct.The 500 cr revenue guidance now makes sense. Thanks.

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Tarson is covered by Edelweiss:

Tarson conference call:
https://www.researchbytes.com/webcast.aspx?WID=245478

Good coverage and many questions are answered in concall.
Disclosure: Invested.

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Tarsons Annual report Takeaways :

Vision : Tarson’s Vision is to grow business and become the most valued Labware Company in the Life Science space through world class performance, creating growing value for the Indian economy and the Company’s stakeholders

The Demand for laboratory equipment like Centrifuge, Liquid Handling systems and PCR instruments is huge in India. Growth in the healthcare services and pharmaceutical market is growing due to improving healthcare infrastructure, which is driving the lab equipment market. The growth of the pharmaceutical sector, investment into R&D and the rising diagnostic centres in India are all boosting the demand for laboratory equipment.

With the growing demand for our products and increased wallet share among customers year after year, we continue to grab market share across segments

**Market share :**Tarsons enjoys a market share of 9-12% of the Indian labware market.

Indian Laboratory equipment is valued at 23,52crores in 2020. .It is estimated that the Indian Laboratory Equipment market will witness 7.8% CAGR in 2020-2025, to reach `3420 crores.

The global Plasticware Lab Equipment market segment stands at 1,20,000 crores, with plasticware products making up to 52% of the total Lab Equipment market segment (62000 crores).

On a YoY basis, our domestic and export revenue grew by 31.4% and 31.3% in 2021-22, respectively. We are enhancing our focus on export to tap the enormous potential of the export business by delivering our best-in-class products.

During 2021-22, our Company generated `100 crores and showcased a 100% growth compared to 2018-19.

Popular product categories such as Liquid Handling, Centrifuge Ware, and Cryo Ware through investment in additional machines, moulds and ancillary infrastructure.

We are manufacturing PCR and enhancing our focus to produce Cell Culture and Bio process in the near future.

With the ‘Make in India’ initiative and growing advantage of domestic manufacturers, as compared to import markets, we believe we are well-poised to expand our domestic sales.

Acquired 5 acres of land to develop a new manufacturing facility in Panchla, West Bengal. We intend to grow and enter new product segment, Cell Culture, through this plant. Further, we plan to develop a new fulfilment centre in Amta, West Bengal, to integrate our warehouse operations.

We also aim to achieve backward integration in our manufacturing process by building an in-house sterilization centre for captive consumption with a target to complete the project by H1 of 2023-24.

We continued to invest in automation to ensure high-level of accuracy and purity, with mimimum human intervention.

At Tarsons, we belong to an industry in which the global MNCs are historically dominant.

We belong to a highly stringent market in terms of quality standards and compliances. We belong to a sector that demands high precision, strong technical capabilities, robust manufacturing practices and excellent sales and marketing skills for a good brand recall.

We are among the top leading names as manufacturers of Indian labware, testifying for our ability to deliver on all the above-mentioned aspects. We have been supplying products to the life sciences industry under our brand label ‘TARSONS’ for the past 39 years.

We have won the trust of the scientists’ community in India.

Offerings include a gamut of diversified products – consumables, reusables, and others – with over 1,700 SKUs across 300+ product categories

Products are supplied to over 40 countries across both developed and emerging markets through a blend of branded and Original Design Manufacturer (ODM) sales. From our total export revenue, branded products generated 43% of our revenue while 57% was contributed by (ODM) sales.

On Price increase : The plasticware product is beneficial for the producers since raw material prices of high-grade plasticware resins (despite being a crude derivate) are not as volatile as crude prices and generally are passed on down the value chain allowing the companies to benefit even while the crude oil prices fluctuate.

Segment wise revenue share :

Consumables : 63%

Reusable : 33%

Others : 4%

A report by the Frost & Sullivan suggests that with the US increasing the levied tariffs and tightening green compliance on Chinese goods over the past few years, Indian players are poised to benefit and gain share over time by providing a cost-effective manufacturing alternative . Tarsons will focus on :

ODM sales to supply products to developed markets such as the US and Europe

Branded sales targeting emerging markets such as Asia Pacific, Middle East and South America.

India is expected to see a huge shift in lab equipment from glassware products to plasticware products due to the latter being favored more since it enables ease of handling, flexibility, and lower costs. In addition, most plastic lab containers are recyclable. Traditional glassware made from borosilicate glass has heat-resistant properties that makes it non-recyclable, thereon, observing higher demand as a result of increased preference. It is estimated that plastic labware products are going to grow by 23% in the coming years.

Covid initiatives :

Provided 15 days paid leave to COVID affected employees and also provided conveyance allowance to our employees during the peak of the COVID.

During the year, we conducted fire drill and also conducted eye check-up for our employees’ safety and health. In addition, we continuously take various initiative to develop and enhance the skillset of our employees.

We have also organized vaccination drive for our employees and their families.

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What’s the right valuation multiple for a company like Tarsons?

On the one hand, consistent 70%+ gross margins, 40%+ OPMs, 2x fixed asset turnover, decent CFO/PAT ratios and zero debt. On the other hand the nature of product and industry does not suggest a very high barrier of entry for new players. With export revenue potential being very high, even with a small domestic market of ~3000Cr, the possibility to grow is significant. Why can’t a new player come in seeing the great margins and ROCEs? Can a Borosil move into plastic labware, or is there zero synergy? These are unanswered questions for me in terms of assessing Tarson’s scope of growth.

Let’s look at valuations of some companies in the Pharma industry with high gross and operating margins:

Syngene : 5Y median PE Ratio 40x
Suven Pharma : 5Y median PE Ratio 31x
Divis : 5Y media PE Ratio 45x
Average 5Y Media PE Ratio : 39-40x

Let’s look at some projected numbers for Tarsons

Tarson’s current revenue 300Cr
Domestic revenue 200Cr
Export revenue 100Cr

India labware market in FY25 : 3400 Cr
India plastic labware market in FY25 : 2550 Cr (As per F&S report, industry is moving towards plastic labware and it expects 75% of plastic share by FY25)
Projected market share for Tarsons in FY25 in domestic plastic labware : 22% (Current share seems to be ~17-18%, so 22% is a reasonably aggressive figure in 3 years)
Projected domestic revenue FY25 : 560 Cr
Projected export revenue FY25 : 200 Cr (25% CAGR from current levels for 3 years)
Total projected revenue FY25 : 760 Cr (Implies 36% CAGR, that’s aggressive)
Projected EBITDA : 304 Cr (Assuming EBITDA margin 40%)
Projected PBT : 265 Cr (Assumed higher depreciation charges of 40Cr/year as 400Cr capex is incoming for the new Plant)
Projected PAT : 200Cr

Market cap @ average PE of 39x : 7800Cr.

If we consider the valuation multiple for a company like Tarsons to be @20% discount to the average multiples of high-science high R&D companies like Divis and Syngene and assume a PE of 32x, then FY25 Mcap is ~6400Cr.

Thoughts on the above?

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In any manufacturing business where investment in fixed assets is high and working capital is stretched one needs operational efficiencies to get a decent ROCE. Cost advantages are built over time with scale and a lot of tinkering along the way(e.g. incremental innovations in manufacturing / identifying and reducing idle time on machines/ better inventory management, etc) Not easy.
Plus as a new entrant with minimum SKUs any distributor will need a lot of incentives to sell your products to his clients who themselves will need a lot of incentives to switch. How long can the new guy under price tarsons while working on wafer thin margins. There’s a reason why thermofisher still imports majority of its plastic ware instead of manufacturing here

Disc: invested

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That is not true.

Here is list of manufacturing site iso certifications for thermo fisher

Please find nashik factory in it. From thermo fisher india page:
About Thermo Fisher Scientific India

We have established a considerable commercial and manufacturing footprint in India. With more than 500 Customer facing professionals, we ensure a broad geographic coverage. Our facilities in Nasik & Navi Mumbai manufacture or assemble products for Trace chemical analysis, UV-Vis spectroscopy, Liquid handling, Continuous Emission and Ambient Air Quality Monitoring. Our facility in Ahmedabad is specialized in Clinical studies support and is also the APAC Centre of Excellence for Chromatography Consumables. Our supply chain capabilities include a large 70,000sqr ft warehouse with 12 satellite stock points and an extensive network of Distributors.

About Laboratory Solutions India
Given the business synergies and the common customer base that were being served through Laboratory Product Group (LPG) and Fisher Scientific India, a strategic initiative was taken to merge these businesses to form Laboratory Solution India (LSI) which will provide customers with the following opportunities:

Access to a broader, more solutions-oriented portfolio which includes self manufactured products as well as strategic external products.
A simplified way to reach out to us for your day to day laboratory needs.
One stop solutions for your needs on Chemicals, Consumables, Equipments, Life Science and Microbiology products.
Faster response to your queries.
Better support and customer experience.
Nationwide network of equipment service resources.
Our focus is to bring value added products and services to help you do your job more effectively. We are committed to strengthen Thermo Fisher Scientific India organization to bring our core goal of wider choice and customer convenience to you. On behalf of everyone at Thermo Fisher Scientific’s LSI team, we thank you for your continued trust and reassure you of our commitment in delivering our promises.

The best justification i have seen for tarsons is to compare it to polymed & claim that it is cheaper. Relative valuation stops working when everything being compared is overvalued. Of course whether something is overvalued can only be known in hindsight. If tarson can grow 30% for 3 years 20% for 5 years & 10-15% after that, then current valuation might appear to be cheap.

One thing to be said in favor of their business is : as far as i can tell, distribution is the moat in this business. Your end consumer is extremely fragmented & so one has to build a strong distribution network. Tarson does seem to have it. Of course that would not be much protection against some large competitor entering with large capital. But that is true for 95% of businesses not just tarsons. As of now personally see the concentration of all factories in Bengal as one key risk : other listed cos who operate put of Bengal, experience of their investors can guide investors here on what kind of risks exist. The only reason I did not invest in tarsons is imo better opportunities exist. Also, with an extreme competition increasing in diagnostics the gross margins of all the supply chain players are bound to go down. One can already find this out if one talks to tier 2/3 diagnostics players. Could it be a case of peak multiples to peak margins ? That is what investors have to ask themselves

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I know they have facilities here but I was talking about plastic labware manufacturing- the segment that tarsons operates in but turns out thermo does manufacture some plastic labware in India though majority is still imported. Thanks for that. Have edited my orginal post to reflect the same.

Geographic concentration doesn’t worry me but this does. 40% margins make me uncomfortable not happy. For now i ll keep holding as long as they deliver.

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Also, with an extreme competition increasing in diagnostics the gross margins of all the supply chain players are bound to go down. One can already find this out if one talks to tier 2/3 diagnostics players.

I don’t think this correlation is necessarily true. Case in point, Saregama. The music streamers down the supply chain are in a cut throat competitive business but Saregama is still pretty much in a commanding position wrt pricing because of its content moat. Of course, it wouldn’t want to squeeze streamers dry and upset the whole eco-system, but Saregama isn’t really under pricing pressure either in-spite of intense competition down the supply chain closer to the customer.

Seems to me like Tarsons is building a similar moat around plastic labware. As you and @GARP_niveshak said, distribution, capex intensity and no. of SKUs are definitely substantial barriers to entry although surely not insurmountable for a well capitalised adversary. This latest 400Cr capex aimed at cell culture seems to be aimed at further solidifying that moat. Any new player, no matter how well capitalised, will take at least 3-5 years to come on level terms with Tarsons in terms of cost, distribution network and SKU collection.

The most likely vector of competitive entry seems to be an acquisition of an existing domestic player like Abdos or Genaxy Scientific (tiny players even compared to Tarsons) or even the Indian arm of a global giant like Eppendorf India/ThermoFisher India by a large player. Another possible entry is extension of Borosil Scientific (This is de-merging from Borosil Ltd this year) into plastic labware. But either of these moves are likely to take at least 3 years from today to significantly challenge Tarsons as there is no sign of any such move at the moment. It seems like Thermo and Eppendorf haven’t cared about the Indian market at all so far. Will the possibility of exports from India wake them up? Key monitorable IMO.

Till such time as we see a significant competitive move, Tarsons seems fairly insulated IMO. But the time to buy was certainly when it was trading closer to 600 INR a few weeks back rather than now, when its climbed up 40%.

On my watchlist, will enter if valuations calm down.

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How long can the new guy under price tarsons while working on wafer thin margins. There’s a reason why thermofisher still imports majority of its plastic ware instead of manufacturing here

There’s no need to wait for the new player to win in terms of pricing and inventory against Tarsons. The mere entry of a credible labware products player will ensure Tarsons’ margins come down. Labware product will be on the lookout for such an entry and will start negotiating with Tarsons as soon as the new guys starts supplying. Or Tarsons will pro-actively reduce prices to start game-theoretic competition.

The point is while projecting Tarsons’ margins into the next 3-5 years, some weight has to be assigned to a possible competitive entry and a downward correction of existing margins is prudent in my opinion.

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Not a fair comparison. The pricing power& competitive advantage are very different. Tarson is only 1 out of 5 plastic ware products which are a commodity, substitutable with any other consumable.
Saregama ip is unique & being 2nd largest player it’s not possible for anyone to exclude saregama (no substitution possible)

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Current market share of Tarsons in domestic market is roughly 12%. Tarsons does 200 crore of domestic sales in the plastic labware industry which was valued at approximately 1225 crores in 2020. Assuming a growth rate of 15% for the industry, the total plastic labware market would be around 1600 crores in FY’22…
The 560 crore domestic revenue target for FY’25 seems unrealistic. To achieve that, they will have to compound revenues at 40% for the next three years.
Management themselves have said they are aiming to do 500 crores by 2025.

Discl:Invested,

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The 560 crore domestic revenue target for FY’25 seems unrealistic. To achieve that, they will have to compound revenues at 40% for the next three years.
Management themselves have said they are aiming to do 500 crores by 2025.

That’s a revenue CAGR of 19%, same as the last 3 years. Seems too low for me.

Well, if that’s true, then Tarson’s present valuation is probably discounting its FY25 earnings already. 500 Cr revenue @ 45% EBITDA with 40Cr depreciation (450-500Cr capex incoming as per latest concall), will result in ~140Cr PAT, which translates to ~5600Cr MCap @40x PE. These are the most optimistic set of numbers and they result in a stock CAGR of ~7% over the next 3 years from current levels.

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This can be said about any new entrant in almost any industry involving physical goods. High ROCE attracts competition and competition will try to under price you. It’s just how competition works. You mentioned 2 domestic players. From what I hear their products aren’t bad. They are growing,their products are cheaper yet tarsons has improved it’s margins over the years. How?
I am not saying things will stay this way forever. Someday there will be a worthy opponent but you will see it coming. That’s the good thing about any asset heavy business which is distributor led. Margins might have peaked but can’t be sure

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