Clean Science & Technology - Eco friendly chemical company


Company Name – Clean Science & Technology Limited (Clean Science)


Current Share Price – INR 1,825 (March 1, 2022)


Market Cap – INR 19,381 cr


 

1. What is interesting about the stock?

If you ask anyone to identify which place in India this above picture was taken, chances are that I would receive answers like somewhere in Himachal Pradesh, Uttarakhand, or Jammu & Kashmir. They would have never guessed that the scene above is from the Yamuna river near our country’s capital of New Delhi. So what has happened here? Has the temperature dropped so low that the river is now freezing in Delhi?


The answer is no. This picture shows the river surface covered with toxic foam caused by the dumping of harmful chemical waste.


But the question arises: How do we stop such rapid degradation of our natural water resources? How can we stop and prevent this somewhat amusing but horrifying situation from turning into a recurring nightmare? How can we lessen pollution without paying the cost of economic losses?


The most feasible answer to the above questions is Green Chemistry. Green chemistry is an emerging focus among manufacturing industries that minimizes pollution at a molecular level. And Clean Science & Technology is one of the leading companies in India operating in green chemistry.


The company is a specialty chemicals maker that is looking to walk off the normal path and is one of the few companies globally that is focused entirely on developing eco-friendly and sustainable manufacturing processes of specialty and fine chemicals.

The major products made by Clean Science and their applications are:


The company exports its products to many major industrial markets including China, Europe, USA, Taiwan, South Korea & Japan. In FY21, 68% of revenues came from export sales. Key customers for Clean Science include Bayer AG, SRF Limited, Gennex Laboratories Limited, Nutriad International NV and Vinati Organics.

The segment-wise and geographical breakup of FY21 revenues was:

The company has 3 manufacturing facilities in Kurkumbh in Maharashtra, which is close to the JNPT port, allowing for lower exports’ logistics cost. The company has recently commissioned 2 new plants in its 3rd facility to make new products, PBQ & TBHQ, and increased its capacity for BHA by over 50%.


Industry Overview


The global green chemicals market is expected to grow to USD 45 billion by 2025 at a CAGR of 10.5% between 2019 and 2025. India is emerging as a global hub for manufacturing compared to China due to

  • Tighter environmental norms in China

  • Cheap skilled labour

  • Low production costs in India vs other manufacturing countries

The global market size and expected CAGR till 2025 for key products made by Clean Science & Technology are given below:


The closest peers of Clean Science in terms of application areas and product segments are:

  • Atul Limited

  • Camlin Fine Sciences

  • Fine Organics


Key MOATs

  • The biggest strength of the company is expertise in making green chemicals and engineering processes, which have led to it being near the top in most of its product segments. This not only translates into high market share but also into high margins for the company.

  • The product applications cover a wide variety of industry segments like agrochemicals, pharma, FMCG, food products, etc. The future of green chemistry is inevitable with increased demand from all chemical industry sectors to have greener processes and starting materials that yield less pollution. Clean Science has a good track record in this. For example, all the BHA & DCC made by the company is sulfur-free.

  • India’s position as a sustainable and cheap manufacturing hub is a major competitive advantage for chemical makers in India, especially chemical exporters. The China+1 strategy is also expected to add to the overall opportunity for Indian chemical exporters.

2. Key Historical Financials


The company has grown its sales at a 30% CAGR in the last 5 years and has seen PAT grow even faster at a CAGR of 49% in the same period. It also maintained an average ROE of 42% in the last 5 years.


3. What is my view on company valuation?


The company saw a great IPO in July 2021 with a total subscription of 93.4 times and provided listing gains of over 98% on listing at INR 1,798 over its IPO price of Rs 900.


The stock went on to make a 52-week high of INR 2,705 but is currently trading just above its listing price.


The company currently trades at a P/E (TTM) of 88x vs 78x of Fine Organics, 43x of Atul & 34x of Camlin Fine Sciences. It also trades significantly higher than the overall chemical industry P/E of ~30x.


In terms of EV/EBITDA (TTM), Clean Science trades at 61x vs 47x times for Fine Organics, 26x for Atul & 13x for Camlin Fine Sciences.


The difference between valuations for Clean Science and its peers represents the market potential of the company’s product portfolio and its inherent expertise vs its peers.


The growth of the company is expected to maintain its current momentum despite industry-wide raw material price inflation. The sector growth is expected to stay durable given the rising demand for green chemicals and the company’s product portfolio. We can expect the company to maintain its current growth trajectory with a CAGR of 20-30%, over the next few years, with the company already growing 27% YoY in 9MFY21.


The company looks good for long-term investment and should be evaluated by investors. However, the company is presently very expensive vis-a-vis competition and overall industry valuation.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • The customer concentration risk is very high for the company with the top 1 & top 10 customers accounting for 13% and ~50% of FY21 sales. The loss of any key customer will be very detrimental to the company’s operations. Additionally, China is the biggest market for the company with 37% of FY21 sales. Any adverse political or economic tensions between China & India will be detrimental for the company

  • The company’s main products have applications in mature markets with an estimated opportunity size of USD 870 million in 2025, ~0.08% of the global specialty chemicals market which is expected to reach USD 1 trillion by 2025.

  • Around 48% of FY21 sales were derived from a single product, MEHQ, which is mainly used in agrochemicals. The company is exposed to vagaries in the agriculture industry like weather patterns and agri-commodity prices.

 

About the Author


I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past. Currently I am working as head of Research at Smart Sync Services where we are working on simplifying and expanding financial and investment knowledge to make the investment world as accessible for everyday investors as much as possible.


I graduated from the Master of Finance Program from Cambridge University in 2016 after completing my Bachelor of Engineering program from Jadavpur University, Kolkata in 2011.


I am an insignificant public investor & have avid interest in following emerging trends both in technology and other fast evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.




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