How to calibrate your investment view on Tarsons Products Ltd

Tarsons Products Ltd manufactures laboratory products and lab inputs that cater to the laboratory needs of various client organizations. These client organizations include research labs, university labs, pharma labs, diagnostic labs, CRO labs etc. Tarsons has a total of five manufacturing facilities spread across the state of West Bengal in Eastern India. It has a strong distribution network of over 141 distributors and caters to over 40 global markets apart from India.

Tarsons Products is a mix of fresh issue and OFS

How is the IPO structured?
The principal shareholders of Tarsons Products are the two main promoters viz. Sanjiv Sehgal and Rohan Sehgal. The public holding currently consists of the 49% stake held by Clear Vision Investment Fund.

  • Let us look at the OFS portion first. Tarsons will offer 132 lakh shares in the OFS and at the upper price band of Rs.662, the OFS size will be Rs.874 crore. Out of the 132 lakh shares OFS, Clear Vision will sell 125 lakh shares while promoters Sanjiv Sehgal and Rohan Sehgal will sell total of 7 lakh shares between them.
  • The promoter stake post-issue will be impacted by the OFS and the fresh issue. The holdings of the promoters in Tarsons Products will fall after the IPO from 50.78% to 47.30%. At the same time, public shareholding goes up to 52.70%.
  • Tarsons Products will make a fresh issue of 22.66 lakhs shares and at the upper price band of Rs.662, it works out to Rs.150 crore. That will take the total size of the IPO to Rs.1,024 crore.

The good news is that this is a profit making company with 3 decades history and has been making consistent profits for the last 3 years and growing. The net margins have been building gradually by over 800 bps in the last 2 years. The combination of strong asset turnover, a relatively asset light model and strong growth in NPM indicate that the potential for the company to expand the ROE is good.

How to calibrate your investment view on Tarsons Products Ltd

The IPO is a combination of an OFS and a fresh issue. Here are some takeaways.

  • Lab products are a fairly large addressable market and growing fast enough to create space for competition. Also, these costs are inevitable for research and pharma labs and hence the business is not too cyclical.
  • The indicative market cap of Rs.3,522 crore post issue discounts the net profits of Rs.69cr at a P/E ratio of 50 times. That will look a lot more reasonable if you factor in the consistent profit growth and extrapolate to the future.
  • This is a business of deep relationships and that is where Tarsons has opened long term bridges with clients in India and abroad. Here its portfolio of 1700 SKUs across 300 products would come in handy.
  • Tarsons Products will be using the fresh IPO funds for capacity expansion of its West Bengal plant and also for debt repayment, both of which are likely to be value accretive from a market cap perspective.

Will Investors look at longer term perspective?
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