Upload
others
View
6
Download
0
Embed Size (px)
Citation preview
www.jstinvestments.com
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.
www.jstinvestments.com
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.
www.jstinvestments.com
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)
www.jstinvestments.com
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).
www.jstinvestments.com
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:
www.jstinvestments.com
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.
www.jstinvestments.com
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.
www.jstinvestments.com
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
www.jstinvestments.com
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.
www.jstinvestments.com
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.
www.jstinvestments.com
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
--------------------------------------------------------------------------------------------------------------------------
Thanks for reading till the end!
If you would like to add anything or give any feedback or would like to appreciate the article, reach
out to me on twitter – @AnishA_Moonka or email me at [email protected]!
--------------------------------------------------------------------------------------------------------------------------