Tarsons Products Limited (TARSONS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Tarsons Products Limited Q1 FY '27 Earnings Conference Call. Before we begin, I would like to point out that this conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aryan Sehgal, Promoter and Whole-Time Director of Tarsons Products Limited. Thank you, and over to you, sir. Sir, you're not audible. I think your line is on mute.

Am I audible?

Yes, sir, you are audible now.

Good afternoon, everybody, and a warm welcome to the Q1 FY '27 earnings call of Tarsons Products Limited. I'm joined today by -- with -- along with Santosh Agarwal, our CFO; and SGA, our Investor Relations partners. We have uploaded our results and investor presentation for the Q1 FY '27 on our website and the stock exchange. I hope everybody had the opportunity to go through the same. Building on the momentum from the previous quarter, we delivered a healthy performance in Q1 FY '27 with consolidated revenue of INR 110 crores, growing by almost 21% Y-o-Y. Our stand-alone revenue also grew by 21% Y-o-Y and came to INR 86 crores, marking our highest ever Q1 stand-alone revenue. The performance reflects the resilience of our business model and our ability to deliver growth despite a challenging operating environment. Our domestic sales grew 17% Y-o-Y, supported by the strength of our extensive distribution network, deeper customer engagement and improving demand conditions. We have seen a meaningful revival and improvement in the demand and momentum across end-to-end industries we serve with a notable uptick in customer inquiries during this quarter. The level of customer engagement during Q1 gives us confidence that the demand recovery is not nearly transient, but has the potential to sustain and strengthen over the coming quarters. Importantly, this growth delivered in the quarter has been driven predominantly by our existing product portfolio with negligible contribution coming from our incremental capacities and newly introduced product categories. This is particularly encouraging from a forward-looking perspective as it demonstrates the underlying strength of our core franchise while leaving significant headroom for growth as our expanded capacities and new products ramp up. We believe this positions us well to capture the improving demand environment and deliver strong growth over the medium term. We have built the foundation for the next phase of growth through our investment in incremental capacities, enhanced manufacturing capabilities and expanded product portfolio. These investments are expected to contribute meaningfully over the coming years. Beyond the domestic market, our focus on expanding our international presence provides an additional avenue for growth. As our overseas footprint and capabilities scale, we see meaningful headroom to increase our overseas contribution and deliver sustainable profitable growth over the medium and long term. Speaking of our overseas business, following the disruption witnessed in the previous quarters due to geopolitical tensions in West Asia and the uncertainties related to the U.S. tariffs, our export business from India saw a healthy recovery, growing 29% in the first quarter. Customer inquiries and order pipelines have recovered with healthy momentum with increasing inquiry levels translating into healthy order conversions. While the operating environment remains dynamic, the recovery is -- in customer activity and improving order visibility provide encouraging signs for the coming quarters. The growth in exports is also being supported by our ongoing participation in international trade fairs and exhibitions, which has further enhanced our visibility, enabled us to engage with new customers and markets. The benefit of these initiatives are now increasingly translating into inquiries, customer additions and order wins. We are seeing encouraging opportunities in the white labeling segment and expect this to be a key growth driver in the export business going forward. As our international footprint expands and our brand gains greater traction, we believe exports represent a meaningful growth opportunity and remain well positioned to capitalize on improving market conditions. During the quarter, our German-based subsidiary delivered a resilient performance with revenue growing approximately 6% year-on-year in constant currency terms. While the operating environment remains challenging, the business has demonstrated encouraging resilience. We remain confident in its long-term growth prospects supported by strong customer acceptance of the Nerbe brand. We are confident of a considerable growth runway that can be unlocked through deeper integration and synergies between Nerbe and Tarsons. Leveraging Nerbe's established network and strong customer relationships to cross-sell Tarsons manufactured products presents a meaningful opportunity for us. Talking about our profitability, the margins moderated in Q1 FY '27, primarily due to the sharp escalation in raw material prices over the recent months. Our key input costs have gone up anywhere in the range of 25% to 50%, putting pressure on gross margin. EBITDA was further impacted by the operating costs associated with the recently commissioned facilities. All these facility ramp-ups and revenue contribution scales progressively over coming years. We expect the operating leverage to support the margin expansion. To mitigate the impact of these higher input costs, we have implemented partial price increases during the quarter with full benefits expected to flow through with a 1 quarter lag. Also, at the same time, we remain mindful of the competitive environment, and we'll continue to calibrate pricing as required in line with market conditions. Profit for quarter 1 remains impacted by higher depreciation and interest costs followed by the commissioning of our new CapEx. We expect the profit to remain relatively moderate in FY '27 as these costs are absorbed ahead of the full ramp-up of the new facilities. Importantly, the underlying operating performance is expected to strengthen as new facilities scale up with improving capacity utilization and operating leverage supporting profitability going forward. This is reflected in the steady improvement in the cash profit, which has grown 18% year-on-year and stood at INR 25.6 crores on a consolidated basis. This increase in cash profit demonstrates the underlying cash-generating strength and resilience of the business model. Around 4 years ago, Tarsons embarked on a large-scale capacity expansion program with a clear strategic objective to significantly strengthen our manufacturing capabilities, expand our product portfolio and create a stronger platform for long-term growth. We are now in the final phase of this expansion journey with a substantial part of the planned CapEx already commissioned and operational. Over the past few quarters, we have progressively brought several new product categories online while adding capacities for existing products. Commissioning of the remaining facilities is progressing as planned with trial runs underway across select product lines. We expect these facilities to be fully commissioned during Q2 with revenue contribution beginning from second half. With a significant portion of the new capacity now operational, our focus is shifting from capacity creation to utilization and commercialization. These investments have substantially enhanced our manufacturing capabilities and product breadth, enabling us to address a wider range of customer requirements, deepen relationships with existing customers and participate in a fast -- in the fast-growing segments of life science consumables market. As the production ramps up, customer approvals and product adoption progress, we expect benefits of these investments to become increasingly visible from FY '28 onwards, supported by better fixed cost absorption and operating leverage. This expansion marks an important inflection point, positioning Tarsons for sustainable revenue growth, greater market penetration and improved returns on invested capital. To summarize, I would like to say that the industry has experienced a challenging demand environment over the last few years, but we are now seeing signs of recovery. Despite these challenges, Tarsons has consistently outperformed the industry and strengthened its competitive position. With the industry outlook turning more positive, we remain optimistic about a stronger growth trajectory moving forward. During this period, we undertook the largest ever CapEx program in the company, significantly expanding our capacities, capabilities and product portfolio, thereby creating a strong foundation for the next phase of growth. Going forward, as we deepen our presence across domestic and international markets, our ramp-up utilization of our expanded capacities, we expect stronger revenue growth, improved operating leverage and a corresponding improvement in profitability. As all these factors unfold, we remain highly optimistic about our company's growth trajectory over the medium term. With this, I'll hand over the call to Santosh. Thank you.

Thank you, and a very warm welcome to everyone on Q1 FY '27 earnings conference call. Let me take you through the financial highlights for the quarter. The revenue for Q1 FY '27 stood at INR 86.1 crores compared to INR 71.3 crores in Q1 FY '26, registering a growth of almost 21% on a year-on-year basis. Domestic business delivered a strong growth of 17%. Export have rebounded strongly this quarter, growing by almost 29% on a Y-o-Y basis. Gross margin for the stand-alone business in Q1 FY '27 stood at 67.1%, impacted by higher raw material costs arising from the spike in polymer prices. EBITDA for Q1 FY '27 stood at INR 24.2 crores. EBITDA margin was impacted by the lower gross margin and the higher commissioning and operational expenses related to the new facilities. We expect this cost to stabilize and margin to improve as utilization ramp up over the coming years. Profitability continues to be impacted by higher depreciation and interest expenses associated with the new CapEx. Cash profitability for the quarter stood at INR 25.2 crores, showing a healthy growth of 18% on a Y-o-Y basis. Speaking about the consolidated performance, consolidated revenue for Q1 FY '27 stood at INR 110.2 crores, registering a strong growth of 20.7% Y-o-Y basis. Consolidated EBITDA in Q1 FY '27 stood at INR 26 crores with a EBITDA margin at 23.6%. Cash profitability for Q1 FY '27 stood at INR 25.6 crores, reflecting a growth of around 18% on a Y-o-Y basis. With this, we would like to open the floor for questions.

[Operator Instructions] First question is from the line of Rushabh Shah from BugleRock PMS.

Yes. Sir, my question is on exports. So in the last few years we have always in our commentary mentioned that we need to focus more on exports and it will give us significant growth -- export market will give us more significant growth. So what would be our strategy to fight against...

Sorry to interrupt. Mr. Shah, your voice is breaking.

Can you speak a little louder as well, please?

Yes. I'm audible now?

It's still breaking. Yes, please go ahead.

So my question -- my question was that in the last few years we have always mentioned in our commentary that we need to focus more on exports which will give us significant growth opportunities. So what -- I just wanted to know what would be our strategy to fight against these global peers since they have more stronger balance sheet and more number of SKUs as compared to Tarsons?

So I think the segment -- the business segments are quite different. Most of the larger global players in the U.S. and in Europe are branded players with established markets, established distribution networks and established customer bases. But as the world is moving more towards a better priced alternative with maintaining the same quality levels, I think the way our operations are positioned, we are a lean company being able to produce at very respectably high-quality products at reasonable prices, we have a market which we can penetrate, which the global peers find it difficult or do not pay much attention to. And I think the bigger factor for us to look at this point in time is the global environment with the war, the conflicts, the rising escalation costs, tariff threats looming coming in and out every year, I think these are bigger problems than global competition. Global competition was always there. Pre-COVID era as well and will continue to be there even today, and we are well positioned to be able to find a spot in space for us in that market.

Second question was how does each player differentiate itself in the markets, like players like Tarsons, Abdos or Accumax? Can you give an idea about on the industry, how does one player differentiate itself? Is it only the product quality or -- and the price or something else also?

No, I think it's product. Quality seems to be one of the most important points, followed closely by price. But I think the ability to deliver a large portfolio of products consistently to the customer over a considerable period of time is what differentiates various companies in the market.

Okay. And my last question is since we are looking to grow our business outside U.S. and Europe, although we have majority of revenue coming from there. But have we added any of marketing people in those countries where we need to get validation from our customers like outside U.S. and Europe, have we taken any steps to increase our business out there?

We have taken steps. We do not have people directly positioned in those countries as of now. We have people working out of India, looking after those territories, but we are in the process of even having more direct local presence as our revenues scale up and adding more distribution channels because most of the business which happens outside U.S. and Europe happens on a branded basis, not on an OEM basis.

Next question is from the line of Jasdeep Walia from Clockvine Capital.

So why has Panchla commercial commissioning has been delayed? Now in the beginning of FY '26, you had guided for full commissioning at the commercial level in the -- by the start of FY '27. Now it's got shifted to second half of FY '27. So what are the reasons which are driving this delay?

It's just the sheer scale and size in the number of projects coming in at Panchla. So as I mentioned in my opening remarks that a large portion of the products have been commissioned, but there are still a few select lines which continue being commissioned in this quarter. So we are dependent on a lot of external factors, a lot of engineering teams from across the world, which are finalizing on the machines once they have entered into our facilities. So there are a lot of variables involved in this. And different suppliers come up with different kinds of challenges and different operational issues which have to be resolved for, which is a very standard and normal part. It's just the sheer volume of the number of machines and the number of lines, which is leading to a delay of a few months on the remaining lines to be commissioned.

And sir, what has been the contribution of Panchla to revenues in this quarter?

So we don't have an exact number in line, but most of the revenue contributed from Panchla in quarter 1 are for existing products or capacity expansions which have moved into Panchla.

Okay. So first quarter doesn't have contribution from cell culture products?

No, not from the cell culture consumables, but it has got contribution from the bioprocess containers and so on, which are media bottles and filler bottles.

Those were launched last year, right?

Yes, yes, absolutely. And they are fully commercialized and selling in the market.

And in the recent past, have you seen any reduction in competition from Chinese companies given the fact that Chinese government has withdrawn a significant amount of export incentives in the current year?

So, see, in India, most of the competition from Chinese companies came in segments we could not ever compete in or which we did not have a market line for, which is a very, very low-end segment. And in the cell culture segment because that was dominated mainly by MNCs and some Chinese players had a small share. So what we do directly today as a business in India, we don't have much direct Chinese competition. We do face intense Chinese competition internationally from Chinese players in different parts of the world in Europe and U.S. and that intensity has not reduced.

And sir, what's the gross net -- gross and net debt as of now? And interest expense and depreciation expense, have they peaked in this quarter and we will see a reduction going forward? Or how -- what would be the trend?

Jasdeep, this is Santosh here. So I'm giving an answer for this. The gross debt for the company is about to be INR 380 crores and the net debt is about to be INR 330 crores, INR 340 crores, something like that. And regarding your question on deprecation, this year our depreciation is -- on stand-alone basis is INR 24.5 crores. That includes a depreciation of INR 14 crores from Panchla and INR 4 crores from Amta. And still we have INR 160 crores of capital work in progress, which we think that will be capitalized and moved to main capital asset segment in the subsequent quarter, right? So we believe that in the full year, the depreciation will be in the range of approximately INR 105 crores to INR 110 crores. That will be the peak year for our depreciation.

And sir, what's the debt reduction target for this year?

Debt reduction target is about to be -- we are paying INR 70 crores of loan repayment and some LCs are also there which gets converted into term loans. So effectively we believe that INR 40 crores to INR 50 crores of debt will be reduced year-on-year basis.

So net debt will reduce by INR 40 crores to INR 50 crores by the end of this year?

INR 40 crores, we can assume.

And sir, what are the CapEx plans for this year?

There is no CapEx plan as such. As we already said that some maintenance CapEx and some required CapEx will only be undertaken. Otherwise, there will not be any major CapEx.

[Operator Instructions] Next question is from the line of Aditya from Securities Investment Management.

Yes. Sir, just wanted to understand how are the raw material prices trending currently? Have they come down from the peak which we saw in March, April? And what kind of price hikes we have taken in both the domestic and export markets?

So we have not been able to take much of a price hike in the international markets. It's close to 0. And we are relying more on the depreciation of the currency in those markets because the rupee has significantly depreciated over the years and most of the other global players in the U.S. and Europe, which dominate these markets have not taken a price increase. And in India, we have taken a marginal price increase. Although the price increase was larger, but if you take the entire business into equation, where it's been a very marginal price increase, which has not been able to cover the entire extent of all the input costs going up. The input costs were at its peak maybe 6 weeks ago and then started dipping down with a peace agreement and other things in place. There was a sharp decline over the next 10 days. But over the last 2 weeks, again, we have started seeing input costs move up sharply. So it's -- to be honest, it's a very volatile situation, and it's supposed to be tracked week-on-week basis. There is not much stability at this point of time in raw material prices.

So are we -- how should then one look at gross margins going forward? So is this the bottom end of the gross margins? Or you feel that the pressure on gross margins would continue going forward as well? And secondly, sir, any reason why we are more aggressive in taking price hikes in domestic markets seeing the demand conditions improving?

The thing is we have to -- as I mentioned in one of my remarks, we have to calibrate pricing based on the competitive environment. What's happening is prices are moving up and prices are moving down. There are a lot of inventories which are there in the system. People -- some companies would have older inventories could sell at lower pricing and so on. So a lot of international companies are also not wanting to increase prices very, very sharply. So regarding the bottom of our gross margin level, it's difficult to say because today, what's happening is most of the margin erosion, what is happening is happening because of an external environment factor, right? It's nothing related to our internal operation metrics within the company. The pure reason for gross margin going down is higher input costs and higher purchase price of raw materials and inability to pass on the entire price increase to customers. So at this point in time, as we would like to scale up our revenues, we have to be very cautious about where the industry stands, both domestically and internationally.

And sir, how do you see the domestic market going forward in terms of demand? So we are coming out of a low base where there was a huge destocking and there was some competitive pressure. But now going forward, how do you see the domestic market evolving for us both in terms of demand and competitive intensity?

So we look at the domestic market in a multitude of ways. One is we have a very strong base, and we look to leverage strongly into this base and increase our market share and wallet share with customers for our existing products. We look to get very deep into the cell culture market over the next 2 to 3 years and hold a meaningful share in India in the cell culture space. And you must have seen in the government budgets in February this year that the government is focusing very strongly on the biopharma with the Biopharma SHAKTI Scheme and so on and putting a lot of emphasis on biopharma. So what we do today, we cater a lot of our products to the pharmaceutical and the biopharmaceutical needs, and we would also look at a strong pivot into specialized biopharmaceutical products over the next 2 or 3 years to be able to gain a meaningful share in that market as well. And once we are done with all this, I think our benchtop equipment space, which accounts for a very low volume of our business, we would look to ramp that up as well, which is not a very, very large CapEx compared to plastics. But with our distribution network and our strength across the country, we should be able to leverage and gain a lot on the lab equipment and the benchtop space. That's how we look to counter these [ 4 pillars ] in which I believe we would be able to have a very robust growth in the domestic market and be able to strengthen our market share further.

Just one follow-up. So I believe the domestic market used to grow at -- used to do at around 8% to 9%. So are we back to that growth phase?

I believe we are almost there to the late single digits where the domestic market traditionally grew at pre-COVID levels.

Sir, now coming to export...

Sorry to interrupt, Aditya. May we please request you to rejoin the queue for the follow-up questions? Next question is from the line of Rahul Jain from Credence Wealth.

Sir, first question is with regard to the CapEx. So till date, how much CapEx has been completed? And further what is the amount of CapEx which used to be done to complete our entire CapEx -- the huge CapEx plans?

So I will give a perspective. Currently, in our balance sheet, total capital advances is likely around INR 20 crores and CWIP is around INR 160 crores, right? So our major objective is to upgrade this whole pending CapEx. Apart from that, some maintenance CapEx will only [ be polystyrene ].

No, so -- typically, so the amount of CapEx -- from the large CapEx which is pending, is it further INR 150 crores, INR 160 crores that gets completed by the end of quarter 2?

Not by quarter 2. It will be completed within quarter 2 or quarter 3. And this is not a new CapEx. This is an advance related to -- related to the existing CapEx.

Okay. And sir, with regards to, once this CapEx is completed, say by quarter 3, and whatever we have done till date. So firstly, whatever we have done till date, what kind of sales is possible at peak utilization for the CapEx which gets completed by quarter 3, including the one which is done till date?

So on a fixed asset basis, we should be able to turn in at around 0.8x. So we are looking at somewhere around INR 400 crores of incremental revenue over and above what we have in our facilities existing through the entire 4-year CapEx plan.

So roughly about INR 800 crores to INR 850 crores, INR 900 crores is the peak sales possible. Is that correct?

It would -- I would say more like INR 750 crores, what I discussed in our calls earlier. INR 750 crores to INR 800 crores, not INR 900 crores. Yes.

Okay. And with regard to one previous participant asked a question about interest. So the interest run rate, which is roughly about INR 25 crores for the year, including the CapEx which is supposed to get completed in next 2 quarters, can we say this INR 25 crores is the peak interest cost on a yearly basis?

Our current run rate is about to be INR 20 crores per year, and we believe that the same rate will continue in FY '27 also, but in FY '28, it will go down.

It will go down. Sure. Last question, sir, in terms of this entire CapEx, so how do you see the ramp-up in FY '27, FY '28 and FY '29?

So I believe that the industry position looks much stronger than -- it looks the strongest ever in the last 4 to 5 years is what I believe. And if you see our numbers pre 2021, which is pre-COVID, we've grown at a sustainable level of 15% and above every year. So moving forward, I believe that our growth level should be at least that or more because now we have larger facilities, a stronger company, much larger product line and a lot of new products to offer as well.

Okay. So can we look somewhere between...

Sorry to interrupt, Mr. Jain, may we please request you to rejoin the queue, sir? [Operator Instructions] Next question is from the line of Jasdeep Walia from Clockvine Capital.

Sir, given that Tarsons is entering a new product segment this year and also the company aims to grow exports significantly. So how have you beefed up your sales team, particularly at the senior level? Can you highlight some key hirings that you've done and their profile?

So we've -- the key hiring we have done for sales in a senior level position, in an SMB position that was already communicated to the markets. And he would be involved in a lot of revenue and strategy and growth for the company and a lot of teams have been built below him domestically as well as in certain key geographies. Internationally for now, the teams will be based out of India looking into international markets. But as we scale up further, we'd look at some local hiring in certain key geographies.

Sir, except the hiring that you have disclosed to the exchanges, any other senior level hires that you have done?

No, otherwise we would have disclosed it. He would have been in SMB. So we have a lot of mid to senior level hirings happening alongside, but all below the gentleman. So all reporting to the gentleman.

Next question is from the line of Kiran from TableTree Capital.