News Analysis

Clean Science and Technology Ltd IPO: Clean, but pricey listing

Sai Prabhakar Yadavalli BL Research Bureau | Updated on July 19, 2021

Promoter compensation may be reined in; however, current valuation is unsustainable

Clean Science and Technology Ltd (Clean Science) nearly doubled on listing and traded at ₹1,784 per share compared to the IPO price of ₹900. Clean Science’s strong listing, following 93 times oversubscription, has pushed the valuations into a clear overbought territory as the company was priced at 96 times FY21 EPS (at the opening bell) compared to industry average of 58 times FY21 EPS. The stock has corrected marginally by 10 per cent from its peak post listing, and at the time of writing this, was trading at ₹1,600 per share or 85 times FY21 EPS.

IPO investors who have been allotted the stock can book profits as the premium at which the stock is currently trading makes the risk-return profile unfavourable for long-term investors.

Should you invest in Clean Science and Technology IPO?

We had recommended avoiding the IPO for long-term investors based on two factors — high promoter compensation and high valuations, even as the reported financial growth of the company was a strong point to the issue. The promoter compensation, amounting to 17 per cent of PAT for the last three years, was touched upon by the management in the run-up to the IPO in a media interaction.

The management indicated lowering the performance bonus to 4 per cent cumulatively, going forward, which partially addressed the concerns. But the high valuations at the time of IPO remain a point of concern. The price to earnings of 48 times at the time of IPO now stands at 85 times and is valued at a premium to larger and more established players like Vinati Organics, Camlin Fine Sciences, Navin Fluorine and Atul.

Business and financials

Clean Science is a world leading producer of four speciality chemicals (MEHQ, BHA, Anisole and 4-MAP) and has a sizeable market share amongst the other three in its portfolio (Guaiacol, DCC and L-AP). The company added capacity in the last three years (2019-21) and installed capacity grew at 19 per cent CAGR in the period, which drove a revenue growth of 14 per cent.

Clean Science, GR Infraprojects IPOs get robust response

Clean Science has a well-integrated model that allowed for gross margins of 76 per cent in FY21, which improved from 57 per cent in FY19. The company will add two more units or 60-70 per cent more capacity in the next three years. It will add new product lines and increase existing share by 15-20 per cent in each product.

The growth indicated for the next three years is more than factored into valuations, leaving little scope for error in capacity and market share expansion. The industry leading 50 per cent EBITDA margins may also be challenging to sustain, in a volatile phase for oil-based input commodities.

Published on July 19, 2021

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