TARSONS products ltd

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.