Should you invest in Clean Science and Technology IPO?

Clean Science and Technology Ltd (Clean Science) is coming with an IPO, with an offer for sale of up to ₹1,546.6 crore. The IPO priced at ₹880 – 900 per share values the company at ₹9,560 crore, and is open from July 7-9, 2021. Clean Science is a low effluent producer with leading capacities in the world for 4 speciality chemicals (MEHQ, BHA, Anisole and 4-MAP) and is amongst the largest for the remaining three products (Guaiacol, DCC and L-AP). The company’s products find application across most major industries like agrochem, food additive, performance and pharmaceutical industries. Customer base includes exports of 67 per cent, including exports to China accounting for 37 per cent of FY21 revenues. The top client and top ten clients account for 13 per cent and 48 per cent, respectively, indicating moderate concentration risk. The company’s ownership is closely held and promoters are expected to retain 78.5 per cent post IPO as well.

Clean Science has a strong set of financials and is poised for further capacity expansion in the medium term as well. However investors can wait for now and not rush to buy the stock due to couple of factors which might dampen long term investor interest - high valuations and key personnel compensation.

Clean Science remunerated its three management personnel, who are also from the promoter group, at close to 17 per cent of PAT for each of the last three years. For FY21, the compensation amounted to a sizable ₹32 crore. High remuneration may not be a direct governance issue, but the post issue minority shareholder interest will be better served if surplus is distributed in the form of dividends or reinvested back into the company.

The IPO values the company at 48 times FY21 earnings of ₹18.7. The speciality chemicals industry which has seen strong expansion in capacities along with an improvement in margins, has supported these valuations in the last two years. The company valuations, which are higher compared to broader Nifty-50 PE of 28 times, pegs it at the lower end of industry range at 42 – 75 times. However high growth factored into such valuations will have little margin for error from economy, industry or the company at such premiums.

Financials

Clean Science’s revenue grew at 14.1 per cent CAGR from 2019-21 and was driven primarily by installed capacity growth of 18.6 per cent CAGR. The company’s yield improvement and backward integration led to gross margins of 76 per cent in FY21 from 57 per cent in FY19. The company maintained a strong balance sheet through the expansion programme with net cash on its balance sheet (2.6 per cent of market cap) and efficient working capital cycle (45 – 75 days) as of March 31, 2021. The company now has a strong financial profile with RoE of 37 per cent and EBITDA margin of 50.5 per cent in FY21.

Strong Backward Integration

Clean Science management maps the strong jump in gross margins, primarily to its effort in backward integration, apart from product mix and lower raw materials costs. Anisole is a pre-cursor to MEHQ, which itself is a starting point for two other products manufactured by Clean Science, 4-MAP and BHA. Anisole was commercialised from liquid phase technology to vapour phase, greatly improving its yield and tripling its capacity from 2018-21 period, completing a strong in-house supply chain. Yield improvement reported by the management also adds to cost competitive position, where the company exports to Chinese market as well. The higher margin products gained from such processes at Clean Science have a higher weight in the overall product mix at 69 per cent in FY21, growing from 63 per cent in FY19. Clean Science has global market share ranging from 35 – 50 per cent for most of its products which it expects to drive upto 50 – 62 per cent.

Judicious Product line and Capacity expansion

Clean Science has invested time for a staggered product line extension. Starting from MEHQ and Guaiacol in 2009, it added value added products 4-MAP and BHA in 2011 and 2014 respectively. It further added Anisole capacities with high yielding processes from 2017, which further integrated the production processes. The two plants located at Kurkumbh, Pune now have an installed capacity of 29,900 MTPA and a blended capacity utilisation of 72 per cent, after witnessing strong growth in the last three years. Clean Science management is confident of adding two more units, Units 3 and 4, of which Unit 3 is under construction and Unit 4 is undergoing environmental clearances. Clean Science is expecting to add at least 20,000 MTPA in the next three years to supplement its existing product lines and also look at other speciality chemicals which can leverage the existing production processes.

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