TARSONS products ltd

Some things that stands out in business model

  • Large no of SKUs and product categories- reaching 2000 and 300+ respectively. This when seen from sub 350 cr revenue, doesn’t make entry for new entrants attractive, which in turn means current customers will likely go back to Tarsons for incremental orders. AR further emphasize mkt share and wallet share focus. How many companies can boast of newr 80% GM and come out unscathed in last 2 years of insane commodity+ logistics issues.

  • Start small and do it well before scaling big - Tarsons despite 30+ years history have not jumped all over at one go - now pushing pedal on exports( that too with clear startegy of ODM in developed mkt vs Own brands in emerging) and foray in Cell culture- thus past Tarsons opportunity size was X and now it is multiple timesof that number.

Lets see how both exports and Tarsons doing - industry exports and recent month deliveries from Tarson looks encouraging ( data may not be comprehensive but point is trend)

  • When industry itself is going to grow in high teens / early 20’s ( AR 22) , with some efforys, Tarson can continue its trajectory of 30%+ growth - as articulated in Mgmt commentary as well - retain or exceed past growth rate. We all know market likes high growth and award valuations accordingly, high margins and biz quality is bonus.

  • Part of capex is for sterilization capabilities in house, that adds few% margins and from customer angle one place to get it all.

  • On mfg location - two ways to look at it, pre IPO some of the mfg location were on lease, with new capex and new owned facilities its easier to extend where you are already part of eco system( approvals, people, moulds, upcoming sterilization etc). Given distributor led model, company focus is to ensure channel is well covered as demand is from key demamd regions and that doesn’t seem like a challenge esp logistics costs not affecting margins etc. As their export biz picks up( whitelabeled) - it would be easy to decouple at some point and look at near port type setup.

  • This is one of very few companies ouside auto sector/ capex plays which is closer to ATH even before mewningful mkt recovery, strength suggests good demand from participants, esp strong hands.

  • Not going into china+1, current energy crisis affecting competetion in EU/ US etc, glass to platicware transition but again tailwind helps.

  • Though RM is linked to crude and generally company takes price hike once a year( if not mistaken Q1) - broadly they have maintained insanely high GM and increased EBDITA over last crazy year - one less key variable to worry about on supply side.

  • One can also look at Borosil capex & commentary on labware( though there focus is glass)- another validation of high demand from labware.

Invested

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Is this graph accurate? Looks like the legend colors have been interchanged inadvertently?

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@Dev_S Given these strengths, what would be your estimate of the fair valuation for Tarsons? It would be interesting to compare with my numbers.

Very tricky question @nirvana_laha , while ur valuation model are quite logical and broadly I agree, though expect margins to sustain near current levels, on back of scale and sterilization part. In my limited experience, as long as rev growth comes at high rates of 30% ( and for many years runway) and margins sustains in current range, it will get valuations which will be on upper quartile/ super optmist case scenario.

Now key Q is - is it a peak margin and peak growth case? Here am inclined with technicals given recent price volume action in relatively subdued market, . Given limited history of company in listed world, lot will depend on how they deliver in upcoming Qtrs but market is surely seeing something which will become clearer down the line. Had this been the case pre Oct 21 era( a hindsight view) - any and everything was running, thats not the case anymore.

Not sure if this answers your Q on valuations, just shared thought process, lets see how future unfolds.

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yes, colors interchanged by mistake.

Agree with Sahil that

  1. The uniqueness of IP protects Saregama.
  2. There can be margin pressure on Tarsons because of the cut-throat competition in the diagnostic sector.

But this competition can prove to be positive as well in 2 scenarios

  1. The organized diagnostic players taking away the market-share from unorganized players and these organized players generally wont compromise on quality thus they can go/stick to Tarsons, thereby increasing revenue.

  2. If penetration of organized player increases then winning a single client can lead to significant increase in the revenue for Tarsons.
    Tarsons can focus on winning a big client rather than winning 10 small clients.
    Needless to say that this can go other way as well. Loss of one big client can result in significant loss of revenue.

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Does the disruption in the diagnostic space bring an added opportunity to someone like Tarsons? If margins are getting squeezed for diagnostic players they might want to look for cheaper alternatives to MNC’s with similar quality which Tarsons prides its product portfolio to be, I am sure there are more caveats to this theory but would love some insights into this.

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Tarsons 39th AGM :

We serve multiple industries and a brand in life sciences space.

IPO subscribed 77 times.

FY2022 :

48% EBITDA growth

33% revenue growth

We have been able to surpass industry growth. We are focussed on cost reduction to maintain margins.

We have goodwill with distributors

we will report satisfactory results in months to come.

Manufacturing capacity up due to increased demand. In line with expanding portfolio, 5 acres in panchla, fulfillment centre in Amta.

Achieve long term value to all stakeholders

Q&A :

We are developing 2 new facilities (Panchla 5 acres Q1FY24 commence, Amta (state of art fullfilment centre, getting sterilization in-house). Various new products at these facilities. Will keep us in good growth in next 5-7 years.

Amta : 75% of facility will be fulfillment centre, radiation plant for sterilization to save cost and time.

Develop bio process facilities at Amta in future.

Dividend : Capex using funds, will benefit to co. in long term hence no dividend declared. In coming year, will consider.

Penetration in overseas market :

As of today, 33% exports. We are just a decade old in export market.

Lost manpower due to accident ? Our safety norms are upto the mark, we have not had accidents at any plants.

Company : 3.31 crores in CSR Masks to Tata medical, Narayan hru, Local areas.

R&D allocation : no RD directly. Currently since inception till now, captured in project cost, manufacturing stakeholders joint projects (mould

Last 2 RD : we have 10 people add to 30-35 people.

RD budget < 1% now.

At peak 2-2.5% of revenue.

1700SKUs spread 65 machines, 500 moulds. We cant comment on exact capacity utilisation.

25% of products : we are back ordered. Facilities for this

2nd 25% of products : 75% utilisation.

Last 50% product : 65% utilisation.

Imported RM : 2/3rd material, rest locally.

IT Capex : 70-80 lacs, implemented SAP

Power expense : Today all plants using traditional. We manufacture plastic products we will look at sustainability. New plants will have 25% dependance on salar power.

Next 5 years, 2 facilities massive expansion, focus will be executing and delivering. Capacity is consumed. Post then new capex.

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Q1 results aren’t very good. Topline flat YoY and 19% de-growth QoQ. EBITDA has compressed 700bps QoQ and 800bps YoY. This is in spite of gross margins having increased by 140bps QoQ. Mainly due to steep increase in Other Expenses.

I believe, more to do with 2nd and 3rd wave in Q1 and Q4 respectively. Since they directly sell to the distributors, they cant precisely tell the Covid split in the base revenues, but i believe, it was decent enough.

So a flat topline with covid in the base, YoY looks like non covid has grown decent.

Lets see how management addresses this topline in the concall.

Earlier concalls has seasonal aspects explained in call. Q4 being the strongest.

Also price revision is once a year( believe Q1 onwards ) and product mix is equally imp for rev/margins each qtr and range based gyrations are expected.

Neverthless numbers deserves some rational explanations, esp rest of year guidance as they have been vocal about 25%+ growth CAGR/ 500 cr revenue by CY 24.

Whike business quality speaks for itself, No room for major misses with valuations they are at, lot of expectations are built in.

Invested

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YoY growth in non covid highlighted even in presentation

It is funny to note that Tarsons continues to say that glassware products are shrinking and plasticware are increasing as shown below

Whereas if you listen to Borosil concall, you would hear exactly opposite view. I guess truth lies somewhere in between as both interested parties are seeing things as they prefer to see. In conclusion, as an investor, we have to take management commentary with pinch (and sometimes handfull … :stuck_out_tongue_winking_eye:) of salt and let facts/numbers speak for themselves

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In Dec’2020 revenue was 60 cr and in Jun’22 it is 66 cr? Is that normalized growth number? Appears to be too low for the valuations?

Q1FY23 notes :

Q1 is weaker quarter. Q1FY22(last year) was strong due to 2nd wave. FY22 had 15% for Covid, and 2/3rd was in H1.

Despite covid base flat performance.

Like to Like basis, YoY growth.

Demand scenario. Steady demand + huge inquiries.

New products in pipeline. Optimistic about demand going forward

Inflation + supply chain tensions margins margins : freight cost up.

GPM change in product mix impacts demand.

Taken price hikes. Will be seen in next 9months FY23.

Senior management hires in sales + other important functions + manpower for upcoming facilities : kept EE cost high

50k crores in export market (market size)

We are confident of market share in coming years in export share.

Marketing + distribution will involve in export

Panchala : Existing + new products. PCR/Cell culture new products demand seen in domestic/export

Amta : consolidate WH operations for cost saving. Backward integration for sterilization for captive consumption.

Q1FY23 : 29% export contri.

Q1FY23 : GP margin impacted to change in product mix, and some inflation.

Volume growth : 20-25% in FY23.

Q1FY23 : strong demand for non covid.

We are confident of performance in next 9M.

FY22 : 45-50 crores covid, 65% was in H1 (first 5-6 months).

Competition: raised 500 crores.

More investing happens in this industry, we will grow.

GPM in Q1 in line.

Mid to high 70s for full year.

Capex : Panchala : 500 crores (significant progress, going as per plan, in Q1)

Covid revenue includes domestic and export. Domestic would be higher. International : 99% is sea freighted.

We dont see slowdown in overall business.

We have order ready to dispatched, but still container shortage + will doesn’t let us bill.

Sequential basis : GPM Mid to late teens moving forward.

Volume growth : Domestic business, different SKUs, different SKUs. We sale from 10 paisa to 5lac of FG, cant compare on volume basis.

Prices continue to remain stable. We have not yet received price hikes. In coming years, realisation will start to show up.

On 500 crores capex : Approx 250 crores panchla, 100 crore Amta, remaining for existing plant.

30% base business growth if we exclude covid business.

9M looks strong.

Q2 will have base business impact.

We cant take price increases. Things are volatile. Q2 we will see price hikes.

Q1 margin impact (old prices with increased price inputs+ spent on EE cost, new people in RD, senior level production people, distrubution promotional activities, marketing activities).

9M : revenue growth will be normalized + price hikes + maintain margins 46-50%

We hope to maintain FY24 500 crores target.

Also PCR well received. In market.

Cell culture products in panchala so not yet produced.

Q1 historically seasonal slowest out of 4. Q4 strongest. Most of business, towards year end, distributor buying larger quantities to complete targets, consumers buy larger to complete their budgets.

We dont increase price on quarterly basis. Most of times increase price annually.

We have taken price hikes from April 1. Price increase will be implemented from Q2 onwards. Cost from April has remain flat. At this point, input cost remain stable.

Mid to late 40s EBITDA margin guidance.

Capex on production : additional capacities on stream : June 2023. Global part shortage, semi conductor shortage which we need for automation will be a breaker.

3-4 years 100% ramp up based on past history.

We are on time for capex.

Inventory days : around 3 months since we have 1700 SKUs. Depends on product mix.

Post our capex : 15 years useful life. RBM 18% depreciation, 200 crores (L&B incur different depreciation).

FY25 : 500 crores intact.

Demand for PCR has been very strong after pandemic, it was product developed after pandemic

Cell culture : pandemic not functioning at full potential.

From base of 0, we are confident.

There are enough domestic manufacturers. Quality parameters are stringent. Elimating imports will be impossible. MNCs have unique products and hence cant be 0.

Ramping up revenues in panchala and Amta will take it beyond 500 when at potential fully.

We are hiring now for new facility. People need to trained before time.

Covid : 20% in FY21, 15% in FY22.

Filter pipet tips was also driven due to Covid business.

PCR half a billion dollar global market. We see significant potential. PCR was not created for covid. It was for lifesciences industry.

We started PCR capex in 2019 and Covid was in 2020. So we were preparing already for PCR product.

Q2 will have some high base.

Import prices increased, inputs : plastic resins. Not crude dependent. They come from Europe and US. Europe seeing price increases due to tough macros.

We need high quality resins which come from Europe and US.

Customers we cater to, we cant cater with local resins.

While Borosil supplies its lab glassware products to Pharma R&D, QA & QC labs + other institutes (Govt, educational & CROs), Tarsons has vast clientele to cater as far as sectors are concerned (such as Diagnostic chains, Hospitals etc.)

Even product portfolio is very different of both the companies - you will understand the difference if you visit any R&D or QA,QC lab of EU or US compliant pharma plant.

While the product of Tarsons don’t have any moat in pharma (as they are for very basic usage), glass has different grades which all the labs use as per their compliances.

Grade A glass is 2x expensive than Grade B glass and still most of the EU & US compliant plants prefer Grade A glass because it affects their studies in a big way (even a 0.01ml difference will impact production of 5lac tablets - just an example).

Also the reactions can’t be carried out in plasticware products, it has to be either glassware or a composite of plastic and other material (couldn’t recall the actual name). Plasticware items are used mainly for water dilution and other basic usage.

So both of them might be correct in their guidance as products are different and tarsons can’t replace those especially in pharma.

D - not invested in Tarsons but holding Borosil Limited.

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