TARSONS products ltd

Interesting development here.

Tarsons has acquired 100% stake in Nerbe R&D GmbH and Nerbe plus GmbH & Co (German Company in similar line of business, i.e., distribution of plastic labware) for a consideration of ~15 million Euros, roughly 136 Crores INR. (Assuming higher end of band mentioned in disclosure, ie. 10-15 Euros).

This acquisition is done via Tarson’s subsidiary, Tarsons Life Science Pte Ltd. and Nerbe will be a 100% step-down subsidiary of Tarsons after the closure of deal.

Interestingly Nerbe GmbH is a profitable company with 4.9 Million Euros EBITDA and 16 Million Euros of topline in FY 22, earlier years were better in terms of profitability. (Seems a distress acquisition)

Disclosure: Holding.

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Acquisition con-call

  1. Globally, Plastic labware market is around 50 thousand crore. Europe is 2nd largest market in plastic labware

  2. Co was evaluating various routes of inorganic growth and this company seemed to meeting the desired objectives

  3. Nerbe - Hamburg based company. 4 decade old entity. Well spread product portfolio. Presence in 30 countries outside Germany. Promoter will continue to run the company.

  4. Acquisition gives Tarsons the gateway to expanding in Europe.

  5. Deal value estimated to be around 10 to 15 million Euro. Milestone based payment. Exact value will be based on FY 24 numbers…

  6. Deal is based on FY 23 Numbers. They felt that it’s the right price and not very cheap…

  7. Will be funded through internal accruals.

  8. Acquisition should be evaluated looking at the synergies and market expansion opportunities, and not just based on EBITDA multiple

  9. While there were questions on dip in FY 22 revenue, management responded that the larger objective was to scale up Tarsons products in the huge European market.

  10. Nerbe’s Inability to scale up - Conservative Family run business. Wanted to remain focused in Europe and did not look to scale up or expand beyond.

Disc: Tracking

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In the recent investor presentation Rohan Sehgal quoted the following. " Our recent strategic acquisition of Nerbe, a Hamburg-based distributor specializing in plastic labware products, enhances
our global presence through channel partners, facilitating quicker access to larger markets. Nerbe serves as a gateway for expanding our footprint in Europe, accelerating our geographical growth in the long run"

I am already invested in Tarsons.

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Few comments on what I understand from the Concall and Credit rating reports:-

  • The growth potential for the plastic usage in the lifescience market exists. However, the company presentation provides market intelligence only till FY2025. I would have preferred an overview till FY2027/28
  • Nerbe is the 1st ever acquisition for Tarsons. Even though the pricing and valuation look reasonable, the management has no experience in M&A. Some of the companies like Affle who have grown via M&A also take 12 to 18months for developing synergies. The management guidance to derive benefits from Nerbe in 8 to 10 quarters sounds too pessimistic. Probably inexperience of M&A ?
  • The operating margins have dropped due to higher sales of consumables. Tarsons is entering into new products and management already plans push sales with some promotional offers. Even though the guidance is to retain EBITDA margins, I am not convinced the untested waters will allow it. Specially, since economies of scale will not be available for a couple of years
  • As per the concall, the utilization for the new plants are expected to take 4 to 5years. This is slightly slower than the industry target of 3 to 4years. However, it means the PAT may stay subdued for the next couple of years. The 1st commercial production expected in Q3FY25.
  • Another red flag is the sudden increase in working capital. It seems the sales are not getting converted to cash. A sign of push sales.
  • Another risk I see is the concentration of Manufacturing units in WB. There is a economic advantage to have most production units close by but some diversification would also help reducing risk.
  • The credit agencies have switched the rating to “Under watch” due to certain non-disclosures of Nerbe acquisition. The Mgmt, plans to bring out all details by the next quarter. Waiting for the next credit report.
  • Red sea crisis will have an impact on the sales as the smaller customers have either put their orders on hold or postponed the same. Already the share of export revenue is considerably down in FY24. I expect the trend to continue, thereby impacting the margins further in coming quarters.

Overall, even though the mgmt has done well over the last 4decades, at this point I see too many uncertainties in the business. I would personally choose the option to wait and watch from the sidelines and see the story unfold. Prefer to enter with some light at the end of the tunnel.

Disc: Please do your due diligence. This is not a buy or sell recommendation. This is my personal assessment of the situation.

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Stock is bottoming out significantly and looks very attractive on the valuation front; on the other hand, manufacturing is about to kick off at least in the Panchla facility, but the real question is why Mr.Market is not looking at this as an attractive pick?? There is so much moat in using plastic labware, new facility launch, an increase in CDMO space, diagnostic tailwinds, etc., which definitely helps this business to improve revenues, and as most of us say, sometimes common sense is the key to winning in the stock market, and I see decent risk to reward coverage in this. Kindly share your views and any latest updates.

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Disc: invested near 500 level

What matters is the position sizing and how much percentage would U allocate to this …are we overlooking the immediate risks like a) liquidity is still strong so what happens when market goes down further b) Europe is still weak so the expected spending is still not coming in the immediate future c) how well the new facility can ramp up sales d) wat can be the eps in 3 4 yrs timeframe and where could be the stock price e) depending on the margins if U can arrive on eps or say 20 ,30, 40 in the next several how much return this can give and finally f) are we seeing any other nice opportunities where we can increase our position which might have much more visiblity than this

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Agreed. Just adding my 2 cents,
The raw material costs for the co. increased significantly during past few quarters.
Also, recovery of slowdown in demand from countries like Europe is still uncertain. The dreams shown for the growth of plastic industry seems too far fetched.
I think their capacity expansion is also facing some problems. It missed the deadline at which certain part was supposed to be completed.
Surely, if we apply a variant perception here, there can be a great opportunity but one needs to look out for above risks also.

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