Should you subscribe to Tarsons Products IPO?

West Bengal based Tarsons Products has been engaged in production of consumables and reusables for laboratories for over 36 years. The company built a strong brand in the domestic markets based on product reliability and durability, strengthening its market position in life sciences equipment industry. Tarsons has garnered 10 per cent market share in the domestic laboratory equipment market (as of FY20) facing tough competition from MNC leaders such as Thermofischer Scientific and Eppendorf, operating in the country. The company is also expanding into export markets with an increasing share of its branded products.

Academia, pharmaceutical research, diagnostics, hospitals and CROs (contract research organization) are the main end-users of such equipment, with each industry providing a diverse growth platform at the top line. The company proposes to build a large facility in the next two-three years and an additional fulfillment center, sustaining its growth momentum into the medium term with the fresh IPO proceeds.

The IPO is open from November 15-17 with a price range of ₹635-662 per share. The IPO will have a fresh issue of ₹150 crore and an offer for sale of ₹873 crore largely from an investor group and not the promoter. Clear Vision, an equity fund which acquired the stake of one of the earlier promoters (49 per cent stake for ₹129 crore) in FY18-19 is offloading close to half of their stake for ₹827 crore through the IPO. The company has demonstrated a high revenue growth and high margin potential in the past and the valuations at 50 times earnings or 15 times sales, FY21, reflects the same.

Investors with a view on the life sciences supplier company should establish continued top and bottom-line momentum, post-Covid interference before subscribing to the issue which is expensive by any standard of comparison.

Revenue tailwinds

Consumables accounting for 61 per cent of Tarsons revenues include centrifuge tubes, pipette tips, petri dishes and vials. Reusables (34 per cent of FY21 revenues) include bottles, carboys, beakers and measuring cylinders. The products find application in laboratories for testing, sampling, measuring and storing.

Tarsons reported revenue growth of 30 per cent in FY21 sales as it overcame the loss of revenues from Covid with better realizations and new product introductions. The management claims that overall, Covid impact was negative to the company due to impact in Q1 of FY21. However this is in contrast to adjunct industries of pharmaceuticals, diagnostics and hospitals’ revenue growth in FY21, which gained from Covid volumes. A weaker base in FY20 also helped; as FY20 reported 1.6 per cent yoy decline impacted by an election year (dip in government funding to academic institutions) and pandemic related slowdown in the last 20 days.

In the medium term, as demand from Covid is expected to wane, the company feels that the return of normal testing in diagnostics and hospitals can sustain demand. Even so, Academia followed by pharmaceutical research including CROs are the main segments for the company and these segments have macro-based tailwinds supporting them. Increasing penetration of healthcare services, R&D outsourcing to domestic CRO’s, higher research focus from public and private institutions can sustain strong demand for Tarsons. Exports which account for 25 per cent of revenues in FY21, consist of 62 per cent supplies to white label (private label) and 38 per cent from branded exports, which Tarsons is keen on increasing.

Tarsons which is into plastic labware is positioned to benefit from higher growth of plastic based equipment compared to glass which is a result of advances in medical grade polymers being used for plastic labware. The plastic labware domestic market is hence expected to grow at 16 per cent CAGR in 2020-25 compared to 7.8 per cent CAGR for total lab equipment market according to industry analysis in the RHP. The plastic equipment is expected to increase its share to 75 per cent by FY25 from an even split currently.

Tarsons introduced a PCR product line in 2019 which should be fully utilized by FY22 end and by FY23 and it expects to fully commercialize a new facility at Panchla, West Bengal. The new facility will develop existing lines and cell culture & bioprocessing related lab equipment with an estimated project cost of ₹80 crore funded by part of fresh issue proceeds of ₹62 crore. With an established base the company hopes to hit its current asset turnover of 0.85 times within a short time with the new facility as well.

Owing to the high reliability benchmarks in life sciences equipment supplies, niche market, and long relationships - Tarsons has been able to generate high margins of average 72 per cent at the gross margin level, flowing through for an average EBITDA and PAT margins of 42 per cent/ 24 per cent respectively , for the period FY19-21. The high margins were further aided by lower sales promotion and travelling expenses in FY21 by around 2 per cent, which can be expected to bounce back as economic restrictions are gradually lifted. It has been able to maintain high operating margins reflected in high return ratios of around 25 per cent RoE as well in the last 3 years, rounding off a strong financial profile for Tarsons.

Valuation

Tarsons has had a strong revenue growth of 16 per cent CAGR in the period FY14-21 which is above the industry growth reported for FY15-20 at 10.3 per cent CAGR. Higher growth in plastics labware, new facilities and continued demand growth should sustain a similar revenue growth for Tarsons in the medium term along with its typically high margins.

The current net debt to equity of 0.19 times can improve to near zero as IPO proceeds of ₹78.5 crore will be used for debt repayment. The IPO pricing at close to 49.3 times FY21 earnings, fully captures the growth opportunities of Tarsons and its high margins. It leaves IPO subscribers with no margin of safety and exposes them to execution risks. We recommend investors can wait for better entry point to subscribe, which balances the risk-reward for the investors as well.

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