Clean Science and Technology IPO: Fully priced, but strong growth potential
Clean Science and Technology Ltd (CSTL) is one of the fastest growing and among the most profitable specialty chemical manufacturing companies globally. CSTL manufactures functionally critical specialty chemicals such as Performance Chemicals, Pharmaceutical Intermediates and FMCG Chemicals. The company’s IPO will open for subscription on July 7 and will close on July 9. The IPO size is Rs 1547 crore. The IPO price band ranges from Rs 880 to Rs 900 per share. Read on more details.
About the company
Clean Science and Technology Limited was incorporated as ‘Sri Distikemi Private Limited’ on November 7, 2003 in Pune, Maharashtra. Ashok Ramnarayan Boob, Krishnakumar Ramnarayan Boob, Siddhartha Ashok Sikchi and Parth Ashok Maheshwari (combined experience of over 60 years in the chemicals industry).
The company’s products are used as polymerisation inhibitors, intermediates for agrochemicals and pharmaceuticals, anti-oxidants, UV blockers, and anti-retroviral reagents. These are used 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.
CSTL has two manufacturing facilities in India located at Kurkumbh (Maharashtra), with a combined installed capacity of 29,900 MTPA and capacity utilisation rate of 72% in FY21.
The company’s key customers include Bayer AG, SRF Ltd, Gennex Laboratories Ltd, Nutriad International NV and Vinati Organics Ltd.
Business potential
The overall market for specialty chemicals is valued at $800 billion in 2019 and is expected to record a growth rate of 5% to 6% over the next five years.
As of FY21, CSTL has emerged as the largest manufacturer globally of certain specialty chemicals (like MEHQ, BHA, Anisole etc.) in terms of installed manufacturing capacities.
Revenue and PAT grew at a CAGR of ~14% and ~43% over FY19-FY21 backed by increase in exports, rise in demand for specialty chemicals and better operating performance.
IPO details
At the upper price band, total issue size stands at Rs 1,547 crore. The issue consists of only offer for sale (OFS), wherein the promoters and existing shareholders will dilute 10.62 crore shares of the company. The prime purpose of the issue is to enhance visibility, brand, provide liquidity to existing shareholders and achieve the benefits of listing shares on stock exchanges.
CSTL enjoys superior EBITDA margins (~51%) and PAT Margins (~39%) in FY21 led by economies of scale, competitive pricing, in-house capabilities, and adoption of cost optimisation techniques.
Clean Science and Technology has a healthy balance sheet with D/E ratio of 0.1x as of FY21. Moreover, the return ratios RoE and RoCE remain healthy at ~38% & ~26% (3-year Avg.).
Valuation
Clean Science and Technology is valued at 48 times price to earnings. Its listed peers such as Vinati Organics, Fine Organics, Camlin Fine, SRF Ltd., Navin Fluorine and PI Industries trade at a P/E of 77.41, 78.53, 290.52, 47.95, 74.60 and 63.86 respectively. As you can see, CSTL IPO is cheaper compared to peers.
Brokers comments:
Geojit – At the upper price band of Rs 900, CSTL is available at a P/E of 48x (FY21) which appears to be fully priced in. However, we assign a “Subscribe†rating for the issue on a long-term basis considering its technical expertise, process innovation, consistent focus on R&D, positive industry outlook, superior margin profile and healthy return ratios.
Sharekhan – At the IPO price band of Rs 880-900 per share, the offer is valued at 47.1/48.2x its FY2021 EPS at the lower and upper end of the price band. CSTL posted strong results in FY2021 with revenues growing by 22% y-o-y and the operating profit growing by 40% y-o-y (OPM expansion of 635 bps y-o-y at 51%). Reported PAT grew by 42% y-o-y to Rs. 198 crore in FY2021. CSTL has a strong earnings track record with 59% PAT CAGR over FY2018-FY2021 and RoE of 36.8%. CSTL’s earnings growth outlook is robust given its strong market share (among the largest producer globally of functionally critical specialty chemicals), consistent focus on R&D, greater cost control and strong long-standing relationships with key customers.
