clean science and technology ltd ipo everything you need

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Clean Science and Technology Ltd IPO – Everything you need to know!

About Clean Science and Technology Ltd

Clean Science & Technology is a specialty chemicals company which produces Performance

Chemicals (i.e. MEHQ, BHA and AP), Pharmaceutical Intermediates (i.e. Guaiacol and

DCC), and FMCG Chemicals (i.e. 4-MAP and Anisole).

Their products are used as polymerization inhibitors, intermediates for agrochemicals and

pharmaceuticals, anti-oxidants, UV blockers, and antiretroviral reagents, which are

functionally critical in a wide range of industries, including in the manufacture of paints and

inks, agro-chemicals, pharmaceuticals, flavours and fragrance, food and animal nutrition

(feed), and personal care (cosmetics) products. The Company was established on ‘green’ or

eco-friendly manufacturing processes led by differentiated catalytic technologies.

About the offer:

Issue Size- 1546crs

Offer for sale (Promoters selling out)- 1546 crs [ The company will not receive any proceeds

from the offer and all the proceeds will be received by the selling shareholders. ]

Price Band- 880-900 /share

Market lots- 16 shares

Mcap- 9550 crs at upper band.

IPO dates- 7 to 9th July, 2021

Industry Trends:

1. Green Chemistry.


2. Indian speciality chemicals are expected to grow double digits till 2025.

a. Tightening of environmental norms (e.g. REACH registration, evaluation,

authorisation and restriction of chemicals regulations) in developed countries

and the slowdown of China are contributing to the growth of exports.

b. China’s specialty chemicals market has seen a downturn in recent years due to

various factors, the most prominent being the introduction of stringent

environmental norms. In 2018, an estimated 40% of the chemical

manufacturing capacity in China was temporarily shut down for safety

inspections, with over 80,000 manufacturing units charged and fined for

breaching emission limits.

c. The labour cost in China was lower than that of India till 2007. However, over

2005-2015, the average labour cost in China increased at a CAGR of almost

19% to 20%, against 4% to 5% in India. Over the last five years, this cost has

more than doubled compared to India, rendering Chinese manufacturers’

uncompetitive vis-à-vis India in terms of labour cost.


3. Key chemicals that the company is selling:

4. The global personal care, pharmaceutical, animal feed, and agrochemical markets are

valued at US$ 255 billion, US$ 1.3 trillion, US$ 425 billion, and US$ 62.5 billion, in

Fiscal 2019, respectively, and are expected to grow at a CAGR of 6.00%, 4.5%, 3.7%

and 6.6%, between Fiscal 2019 and Fiscal 2025, respectively (Source: F&S Reports)


About the Company:

They are developing products using newer technologies using in-house catalytic processes,

which are eco-friendly and cost competitive. They have developed these technologies through

process innovation and consistent R&D. Various catalysts have been developed in-house

through R&D, which are used across process developments, and have helped improve

productivity, yields, atom economy and cost efficiencies. By employing “clean-

technologies”, they distinguish their processes from conventional processes and optimize use

of non-toxic raw materials, resulting in lower effluent generation, and products that are not as

harmful to the end-consumer as conventionally produced chemicals. For instance, they

manufacture sulphur-free BHA and sulphur-free DCC.

They manufacture functionally critical specialty chemicals such as Performance Chemicals

(i.e. MEHQ, BHA and AP), Pharmaceutical Intermediates (i.e. Guaiacol and DCC), and

FMCG Chemicals (i.e. 4-MAP and Anisole). Within 17 years of incorporation, they have

grown to be the largest manufacturer globally of MEHQ, BHA, Anisole and 4-MAP, in terms

of installed manufacturing capacities as of March 31, 2021.

Key customers include Bayer AG, SRF Limited, Gennex Laboratories Limited, Nutriad

International NV and Vinati Organics Limited. Our customer relationships have been

strengthened over a long period, based on our ability to consistently deliver quality products

at competitive prices. Some of our customers have also been associated with us for over 10

years as of May 31, 2021.

Manufacturing: They have two certified production facilities in India strategically located at

Kurkumbh (Maharashtra), in close proximity to the JNPT port from where they export the

majority of our products.

Each facility has an on-site R&D unit, quality control department, warehouse, and effluent

treatment system that treats effluent, to make our facilities zero liquid discharge facilities.

Their facilities have dedicated production lines for our products, with a combined installed

capacity of 29,900 MTPA as of March 31, 2021, and capacity utilization rates of 71.94%

for Fiscal 2021. We have also recently set-up a unit at the third facility adjacent to our

existing facilities at Kurkumbh (Maharashtra), and have recently been allotted land for the

construction of a fourth facility at Kurkumbh (Maharashtra).


65-70% of revenues from exports.

The primary raw materials used in the manufacture of our products (majorly readily available

bulk chemicals) include crude oil derivatives such as phenol and other commodities such as

hydrogen peroxide. We also use acetone, cyclohexylamine, methanol, tertiary butyl alcohol,

and acetic anhydride. In Fiscals 2019, 2020 and 2021, the cost of material consumed

represented 45.42%, 30.52% and 26.90%, respectively, of our revenue from operations.

Dividend Payout policy of 15% of net profit.

Revenue breakup:


Key Personnel are all shareholders in the business

Their Promoters Ashok Ramnarayan Boob, Siddhartha Ashok Sikchi, both alumni of the

Institute of Chemical Technology, Krishnakumar Ramnarayan Boob, and Parth Ashok

Maheshwari, are all career-technocrats with a combined experience of over 60 years in the

chemicals industry, and we benefit from their collective vision, experience and technical

understanding.


Why jump in margins by 20% in the last 3 years? Product mix improvement & backward

integration. Need to track over the upcoming days.

Risks:

1. Continuous investments in R&D: Their ability to continue to design catalytic

processes is a significant factor in their ability to remain competitive. The competitive

advantage is primarily characterised by cost-efficiencies and R&D improvements.

a. In Fiscals 2019, 2020 and 2021, R&D expenditure (excluding Director

remuneration allocated as R&D) amounted to ₹ 20.34 million, ₹ 23.88 million,

and ₹ 27.37 million, respectively, that represented 0.50%, 0.56%, and 0.51%

of our total income in these periods, respectively. (Seems a bit on the lower

side)

2. None of their catalytic processes are patented and their intellectual property may not

be adequately protected: Competitors may be able to imitate these process

technologies and erode or negate any competitive advantage that they have.

3. They depend on the success of their relationships with our customers.

a. Top 10 customers account for 45-50% of the business. Top customers account

for anywhere near 10-15% of the business.

4. They typically do not enter into long-term agreements with the majority of their

customers. Similarly, they do not have any long term supply agreements with their

suppliers.

5. A significant proportion of our revenues are derived from the sale of MEHQ. s.

Accordingly, any significant downturn in the industrial use of MEHQ could have a

significant impact on their business.

a. In Fiscals 2019, 2020 and 2021, revenue from sale of MEHQ amounted to ₹

1,959.95 million, ₹ 1,862.78 million, and ₹ 2,463.63 million, respectively, and

represented 49.84%, 44.43%, and 48.08% of our revenue from operations,

respectively.

6. They derive a significant portion of our revenues from operations from a limited

number of markets.

a. Geopolitical risk: Revenue from sale of products to China, India, Europe, and

the Americas, amounted to ₹ 1,881.75 million, ₹ 1,592.22 million, ₹ 700.50

million, and ₹ 581.67 million, in Fiscal 2021, respectively, and represented

37.12%, 31.41%, 13.82% and 11.47%, of our revenue from sale of products,

respectively, in Fiscal 2021.

7. Geographical risk: Their manufacturing facilities are all located in close proximity to

each other in a particular region: in Kurkumbh, Maharashtra.

Why did the promoters do a buyback at approx rs 60/share a year ago? To restructure their

holdings, No mal-intent as the promoters owned 100% of the company at the time.


Financials

Balance Sheet

- Capital intensive business

- 250crs net cash on the balance sheet: no need to raise any capital through equity/debt

- Working capital under control


Profit & Loss Statement

- Stable growth in business over the years: 16% cagr

- Supernormal growth in margins (from 36% in FY19 to 55% in FY21) leading to

doubling profits in 2 years: Sustainability is questionable.


CashFlow Statement

- Good cash flow conversion: strong enough to support any future capex.

- Capacity expansion has been a game: spent 172crs in the last 3 years.

Conclusion:

However the business is the long cost manufacturer & subsequently the market leader in

multiple products, growth in these molecules has been very low single digits to warrant

expensive valuations of 20x sales & 50x PE, not forgetting the fact that this profits doesn’t

look sustainable. We are giving an ‘Avoid’ on this IPO & would like to wait & watch for

further deliverables by the company.


Terms that matter:

MEHQ Monomethyl ether of hydroquinone

AP L-Ascorbyl Palmitate

API Active Pharmaceutical Ingredients

BHA Butylated HydroxyAnisole

DCC Dicyclohexyl Carbodiimide

4-MAP 4-Methoxy Acetophenone

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clean science and technology ltd ipo everything you need

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