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Tarsons Products (Tarsons) reported a sequentially strong quarterly performance despite the onging slowdown in the life science industry as inventory destocking continues. Its Revenue/ EBITDA/PAT fell 7%/22%/40% on a YoY basis however on a sequential basis the company saw some recovery on the back of volumes and better absorption of fixed costs, its Revenue/ EBITDA/PAT were up by 6%/19%/33% respectively. The company’s domestic vs exports split stood at 65% & 35% both were down 6%/15% respectively on a YoY basis (Domestic/Export- ?431/?232mn in Q2FY24 vs ?442/?271mn in Q2FY23). A highlighting factor during the quarter was a robust sequential improvement of 37% in its export revenue (?232mn vs ?169cr in Q1FY24). Its operating profit fell nearly 22% during the quarter due to expenditure incurred on product development & marketing, higher expenditure for setting up a new facility & employee costs. Its Gross/EBITDA/PAT margin stood at 75%/38%/19% in Q2FY24 as compared to 77%/46%/30% respectively in Q2FY23 however, on a sequential basis their EBITDA/PAT margins have improved by 423bps/397bps respectively. Adjusted EBITDA margin stood at 38.5% in Q2FY24 vs 45.4% in Q2FY23 (Unadjusted EBITDA margin came in at 34% during the quarter). The management reiterated that introduction of fresh product categories and expanding its customer base would help them stay competitive and ahead of the industry as long-term narrative remains resilient. It has also formed a subsidiary in Singapore to engage in investment activities related to its business, including but not limited to the acquisition of other companies, Joint Ventures, Strategic Partnerships etc, as the company is aggressively looking out for potential acquisition in the export markets like Europe & USA

In the near-term Tarsons continue to face COVID-19 overhangs as its consumables business remains in a downtrend however, in the long-term we expect demand for labware products to pick up especially from H2FY24 as contribution from upcoming Panchla (operations to commence from Q3FY24) and Amta facilities (warehouse and in-house sterilisation centre for captive consumption, operations to start in Q4FY24) to drive revenue growth and improve margins. Tarsons has incurred ~?3,800 mn of the ?5,000 mn capex planned over the next 15 months. We have lowered our revenue forecasts as the management withdrew its ?5bn revenue target by FY25. We are now forecasting a Revenue/EBITDA/PAT CAGR of 17%/19%/17% over FY23–25E vs 25%/26%/23% CAGR earlier, owing to persistent slowdown in demand for labware products, weak geopolitical environment, inventory destocking. We have factored in FY24/FY25 EBITDA margin of 46%/47% as their gross margins remains strong (75% in Q2FY24 remained flat QoQ). We retain ‘BUY’ with a revised TP of ?631 (29.5x FY25 EPS of ?21.4) vs ?695 earlier.

Green shoots visible as volume picks up despite slowdown

Tarsons faced quite a few challenges in Q2FY24 just like the previous quarter mainly slowdown in the life science industry, customer destocking, and external pressures, resulting in reduced export earnings since last few quarters but this quarter saw a robust comeback in export sales as the company’s export revenues jumped 37% QoQ albeit were down 14% YoY. Domestic/ Export revenues came in at ?431mn/?232mn in Q2FY24 as against ?442mn/?271mn in Q2FY23 respectively, In the domestic markets Diagnostics, Research and Pharma has seen lower demand and Biotechnology & CRO segment continues to perform well however the management is expecting a gradual recovery in the former segments. The quarter gone by saw some green shoots in demand (despite weak industry scenario) across its product categories including newer products introduced in the start of the year like PET & PETG bottles. The management reiterated that introduction of fresh product categories and expanding its customer base would help them stay competitive and ahead of the industry as long-term narrative remains resilient. Anticipating a recovery in the market and investments from the pharma and diagnostics sector in H2FY24, we project a rebound in revenue growth to continue in the upcoming quarters.

Capex & Acquisition update

The upcoming Panchla facility, set to produce cell culture and related items, is anticipated to commence operations in Q3FY24, thus amplifying revenue growth starting Q1FY25. The company is actively seeking M&A opportunities to enrich its product portfolio and expand its market presence into newer geographies in relation to this the company has formed a subsidiary in Singapore to engage in investment activities related to its business, including but not limited to the acquisition of other companies, Joint Ventures, Strategic Partnerships etc, as the company is aggressively looking out for potential acquisition in the export markets like Europe & USA.

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