Long Term Recommendation Tarsons Products Ltd by Edelweiss

Long Term Recommendation Tarsons Products Ltd.

Poised for strong growth supported by inimitable business model

Incorporated in 1983, Tarsons Products Ltd (Tarsons) is one of the leading plastic labware companies in India with ~25% share in its target market. The company provides high-quality and cost-effective plastic labware. It has captured market share from MNCs. Tarsons operates across India through a 50-member sales team and 141 distributors. The export market provides a huge opportunity for Tarsons. The company currently generates one-third of revenues from export through branded (43% of export sales) and ODM sales. Tarsons recorded sector-leading EBITDA margins (~51% in FY22) through sale of quality products, supported by technical expertise and in-house manufacturing. It has garnered a high market share through long-standing relationships with distributors which has enabled economy of scale and cost optimisation. Tarsons is expected to record 19%/19%/18% CAGR in revenue/EBITDA/PAT over FY22–25E, driven by sector tailwinds, capacity expansion by more than 2x, growing export business, geographical expansion and increasing opportunity, with introduction of new products related to PCR and cell culture. We initiate coverage on Tarsons with a ‘BUY’ rating and a target price of INR949.

Strong, well-diversified distribution network provides major competitive advantage

Tarsons has a pan-India sales and distribution network (141 active distributors) that enables it to cater to a wide range of end customers. Furthermore, it has a sales team of 50-member sales team spread across the country focusing on enhancing brand awareness for Tarsons’ products, besides facilitating distributors. Of the total distributors, 75–80% have been associated with Tarsons for more than two decades. This indicates that the company has a strong and well-diversified distribution network across India. The network provides Tarsons with a major competitive advantage, enabling it to serve customers and markets in an efficient and timely manner. The company has a well-diversified product portfolio with 1,700+ SKUs across 300 products. It maintains a certain level of inventory to meet the requirements of infrequent customers. Also, distributors stock up Tarsons’ products to ensure consistent supply to clients. This arrangement, based on a wide distribution network, helps the company minimise risks related to inventory and credit and gain market share.

Huge opportunity in export market; among few players with strong global presence

The global plastic labware market has opportunity size of USD8.2–8.4bn (INR61,500–63,000cr) which provides a huge export potential for Indian players. In 2009, Tarsons started supplying plastic labware to Avantor (earlier VWR; acquired by Avantor in 2017); this enabled Tarsons to expand business to new geographies. Tarsons caters to the branded as well as ODM export market. The company distributes branded products to more than 40 countries through a network of 45 active distributors. Tarsons registered 27% CAGR in export revenue over FY19–22. In FY22, the company generated revenue of INR99.3cr (i.e., 33% of total revenue) from the overseas markets, with the US and Europe accounting for majority of sales.

Robust capacity expansion plans; in-house manufacturing provides cost advantage

Tarsons is increasing its capacity by more than 2x with an aim to cater to the entire INR1200cr plastic labware market. Tarsons runs the largest in-house plastic labware manufacturing facilities in India which enables it to have full control on product quality and deliver products in time, besides providing cost advantage. The total planned capital expenditure is expected to increase 20–25% from ~INR410cr due to increased costs of equipment and construction costs, at both the facilities.

Outlook and valuation – Initiate with ‘BUY’

We expect the domestic plastic labware market expected to grow at a healthy rate of ~16% and players with quality products, wide distribution reliability and competitive pricing to outperform the sector, where Tarsons surpasses peers. The company’s in-house manufacturing capability provides a competitive edge. Moreover, Tarsons has a strong and well-diversified distribution network across India and a diversified product portfolio with 1,700+ SKUs across 300 products, which is difficult to replicate. Establishing a business in such a market is an arduous task; nonetheless, once established, a strong network can drive significant business growth. Tarsons plans to introduce new products and expand its export market; these initiatives would drive revenue growth in the coming years. The company has consistently reported robust financials in terms of growth and industry-leading operating margins, along with superior return profiles, despite the business being capital-intensive. We initiate coverage on Tarsons with a BUY rating and a target price of INR949 (DCF- based, which implies 24x FY24E EV/EBITDA).