Buy This Medical Sector Small Cap Stock For 16% Potential Gains, Revenue To Grow At 19% CAGR

Stock Outlook & Performance

On Friday, the stock of Tarsons Products Limited closed at Rs 823.40/share. Its 52-week low was recorded at Rs 538.70/share on February 28, 2022, and 52 week high was recorded at Rs 924.90/share on November 29, 2021, respectively. As of now, the share is trading at Rs 284.7 above the 52-week low levels and Rs 101.5 below the 52-week high levels, respectively.

The PE ratio is 43.52. The P/B ratio is 8.94. TTM EPS is Rs 18.92. ROE is 20.55%. It is a small cap medical sector stock with a market capitalisation of Rs 4,381 crore.

The company got listed on the stock exchange last year. Its share price in the past 1 week declined nearly 2.88 per cent. The share gained 16.76 per cent in the last 1 month and 7.05 per cent in the last 3 months. In the last 6 months, the stock gained nearly 13.85 per cent.

Revenue To Grow At 19% CAGR

Tarsons reported revenue of Rs 301cr, which the management considers as the base for future growth. Tarsons expects revenue to reach Rs 500 cr by FY25. At full potential, including planned capex, Tarsons can generate revenue of Rs 650-700cr by FY26- 27. Tarsons believes the export share would remain at the current level, as domestic and export revenue will grow at similar rates. Asset turnover is expected to decline 10-15% on account of Rs 500cr capex over the next few years.

Focus on maintaining margins

Tarsons recorded peak level margins in FY22. Despite facing cost headwinds, the company is focusing on maintaining the margins while scaling up operations. Tarsons is foraying into PCR and cell culture products, which is expected to generate margins in line with those of the company's existing products.

Working capital days to reduce with resolution of supply chain issue

Tarsons sources majority of its raw materials from the US and Europe, with a procurement lead time of 45-60 days. Working capital days can improve with the resolution of the supply chain issue.

Competitive intensity

Tarsons operates in a crowded market with intense competition, where players such as Thermo Fisher and Corning resort to competitive pricing to gain market share. This makes frequent price revision (more than twice or thrice) challenging for the company. Generally, customers choose a manufacturer offering the lowest price among the top 4-5 brands including Tarsons. However, Tarsons manufactures and delivers quality products equivalent to those of MNCs at a competitive price.

It enjoys a competitive edge due to its (1) strong and well-diversified distribution network across India, (2) largest in-house manufacturing facility in India that allows to manufacture quality products in a timely manner at a lower cost, (3) well-diversified product portfolio with over 1,700 SKUs across 300 products and (4) better accessibility to high-grade raw materials.

Demand Outlook

Tarsons is witnessing strong demand from pharmaceutical companies, while demand from academia/research institutes/diagnostic companies appears challenging.

Inflation leads to rise in planned capex

The total planned capex has increased to Rs 500cr from ~Rs 410cr due to the higher equipment and construction costs at both facilities. Tarsons has already incurred Rs 240cr out of the planned capex of Rs 500cr and further plans to fund capex through internal accruals. However, it has credit facilities that can be utilised for funding capex, if needed. Of the total envisaged capex, Rs160-180cr will be spent on land procurement and plant construction. Furthermore, though this capex is not expected to generate additional revenue, it is necessary for expansion. Further, Tarsons will incur Rs 20-25cr for building an in-house sterilisation facility, which will lead to savings of Rs 3-4cr p.a. Both the facilities (Panchla and Amta) are expected to commence operations by July 2023 (H1FY24).

Outlook and Valuation

Edelweiss Wealth Research said, "We expect the domestic plastic labware market to grow at a healthy rate of ~16%. Players with quality products, wide distribution network and competitive pricing are likely to outperform the sector, with Tarsons surpassing its peers. Establishing a business in such a market is an arduous task. Nonetheless, once established, a strong network can accelerate 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. At Current Market Price of Rs 846, the stock is trading at 26x/21x EV/EBITDA for FY23E/FY24E. We maintain 'BUY' rating with a Target Price of Rs 949."