Clean Science Technology: Reasonable valuation ensures returns

Clean Science Technology Ltd is tapping the capital markets with its offer for sale to raise Rs 1,546.22. This issue is completely through an offer for sale and at the top end of the price band of Rs880-900, would consist of 171.80 lakh shares. The issue opens on Wednesday (July 7) and closes on Friday (July 9).

The company is into the business of making performance chemicals, pharma intermediates and speciality chemicals for the FMCG industry. Roughly 2/3rd of the total revenue comes from performance chemicals and the balance is shared between pharma intermediates and FMCG industry. The top customer contributed 13.3 per cent revenue for the year ended March 2021, while the top ten contributed 47.9 per cent.

The residue from the manufacturing process results into by-products which are difficult to dispose of and the uniqueness of the company Clean Science, is in being able to manufacture products without these difficult to dispose by-products. The company is into a niche business and the processes it uses to make the chemicals, is the key to high margins which are sustainable. In terms of geography, a large chunk of 37 per cent of revenue comes from China, while the balance is split between India and the rest of the world. In terms of raw materials, 72 per cent is from domestic sources and the balance is imported.

The entire proceeds of the issue would go to the selling shareholders and no part of the proceeds would come to the company. The company has embarked on capacity expansion and is in the process of setting up unit III, which is adjacent to its unit II in Kurkumbh, near Pune. The company currently has an installed capacity of 29,900 tons per annum with 9,640 tons for performance chemicals, 4,060 tons for pharmaceutical intermediates and 16,200 tons for FMCG chemicals. It would be setting up 3 plants in the new unit III initially followed by an additional 3 units thereafter. In terms of future plans, the company has acquired land in the same industrial unit which is significantly bigger than the present units it has and is awaiting environment clearance. From this it appears that they are ahead of the demand curve in terms of manufacturing set-up. As far as product and R&D development is concerned, they have a portfolio of products which is awaiting manufacturing once the new plants come up in the next 3-9 months.

The company manufactures MEHQ, BHA, AP, Guaiacol, DCC, 4-MAP and Anisole. Clean Science is the largest manufacturer in the world in five of the seven products and is number 2 in one product and 3rd in one product. In India it is the same with one difference that Clean Science is the number 2 in India in two products instead of being the third player in the world. This is in the case of Guaiacol.

The competitors for most of the products are Solvay and Camlin Fine Sciences. While there are half a dozen other competitors, they are in one or other of the seven products each. What enables Clean Science to earn such high margins is the fact that it has been doing backward integration in many of its products, enabling it to reduce the cost and thereby increase margins.

Speciality chemicals is a tough business and it requires constant innovation and upgradation in terms of R&D and meeting growing and demanding products from customers. This would be the key challenge for Clean Science to constantly innovate, remain ahead of the curve, produce in an environment friendly manner with almost zero discharge.

The company reported revenues of Rs 512.4 crore for the year ended March 2021, EBITDA margins of 55.5 per cent and a PAT margin of 38.7 per cent. The company earned an EPS of Rs 18.68 for the year ended March 2021. The PE of the IPO is 47.11-48.18 at the price band. The share is valued at comparable levels with its peers. The present top line of the company is however significantly lower that its peer set. The capacity utilisation of the company which is at around 72 per cent is in the process of being ramped up and the key going forward is the rapid increase in capacity, its utilisation and the margins on increased utilisation being maintained. The company offers gains on listing and there are opportunities of price appreciation even thereafter. The share is reasonably valued when compared to its peer set.