Clean Science IPO — All You Need to Know

The IPO tide continues to advance in markets. The latest fish to swim ashore is Clean Science and Technology Ltd. (Clean Science), one of the largest manufacturers of specialty chemicals in the world. (Link to the RHP)

Here are the top-sailing points.

• IPO Launch Date: July 7th 2021
• Issue Size: ₹1,546.62cr ($208.1m) — Offer for sale (completely).
• Issue Type: Book built
• Issue Price: ₹880–900 ($11.8–12.1) per equity share
• Market Lot: 16
• Issue Break Up: QIBs (35%), NIIs (15%) and Retail Investors (35%)

It is a complete offer for sale from the existing shareholders (including the promoters). The stakes of promoter and promoter group shareholding in the company will reduce from 94.65% to 78.51% — still a fairly lofty promoter ownership. Public shareholding, conversely, will increase from 5.35% currently to 21.49% post-issue.

The issue coincides with that of GR Infra. Both are expected to raise a hefty ₹2,500cr ($336.5m) cumulatively in the middle of what is one of the hottest markets we have seen in recent times (Sensex hit an all time high earlier yesterday), nudging companies to capitalise on rich valuations.

Company Overview

Clean Science was incorporated in 2003 in Pune. It primarily produces “functionally critical” specialty chemicals. Specialty chemicals are those which have a number of so-called special applications like, say, cosmetics, adhesives, food additives, lubricants etc.

Besides these, Clean Science also manufactures FMCG chemicals, pharmaceutical intermediates, agrochemicals etc. It is known for its focus on developing new technologies to produce chemicals in a more eco-friendly and cost-competitive way.

The company has two primary production facilities in the country (both in Maharashtra) with a combined installed capacity of 29,900 million tonnes per annum. There are plans afoot for two more facilities at the same site. It also caters to a wide range of customers in India as well as internationally including some prominent buyers like Bayer AG, Gennex Labs, Nutriad International etc.

With global energy and manufacturing supplies progressing towards cleaner options, the growth prospects for “sustainable chemistry” (creating biodegradable products and derivatives) is immense. Clean Science’s contribution to this green progress is two fold.

First is through production. The company uses renewable energy sources (solar, especially) predominantly for its manufacturing use. Plus, its effluent discharge rates are amongst the lowest in the industry.

Second is through R&D exercises. Clean Science’s design and application of catalytic processes is central to its manufacturing. It boosts the company’s energy savings profile and green commitments. It also plans to expand its R&D capabilities in catalysis and improve upon it to enhance its product portfolio in the future.

Financials and Industry Presence

Clean Science is listed at a price-to-equity (P/E) ratio of 48.18x with a current market cap of ₹9,559.7cr ($1.2bn). It is trading at a healthy grey market premium (around ₹480 ($6.4) per share which equals a 53% premium over the upper price band).

However, a 35%+ EBITDA growth story converting more than 50% of its revenues into EBITDA perhaps warrants a premium valuation much like some of its close peers have been commanding.

There has been strong and consistent financial performance in the last three fiscals. In FY21 alone, revenue and operating profit grew at 22% and 40% YoY. The company shows a decent earnings track record with 59% PAT CAGR in the last three fiscals and a return on equity (RoE) of 36.8%. EBITDA growth (39% 2Y CAGR) and margin expansion (18pt upswing over two years) are quite robust and trending well. With a full subscription, the post-issue implied market cap is expected to reach ₹9,347–9,560cr ($1.28bn approx).

Other industry players like Vinati Organics and Fine Organics are trading at 77.4x and 75.1x PE (and over 40x+ on EV/EBITDA) respectively (less ideal than Clean Science). Clean Science has a lesser income compared to the industry average but its return ratio (RoNW) is the highest in the industry.

It is however worthwhile to note that Vinati Organics stock has nearly doubled over the last one year and Fine Organics saw a 60%+ upswing, driving up those multiples. While both these names benefitted from a generally bullish market, it also underlines sectoral tailwinds in the specialty chemicals space which bodes well for Clean Science.

As of March 2021, Clean Science’s share in the global specialty chemicals market (in terms of installed capacity) is as follows:

• Performance Chemicals — 43.9%
• Pharmaceutical Intermediaries — 6.1%
• FMCG Chemicals — 39.3%

The company’s significant presence in the global market can be deduced from the fact that in FY21, revenues accounted from sales outside India represented 67.86% of total revenue from operations.

Industry Overview

Speciality chemicals are low-volume high-value products whose utilities are directly linked to their specific variations. This means the focus is on value addition to create a product that is suited to the demand of the consumer. Unlike commodity chemicals or petrochemicals, these are produced in limited amounts as per specification.

Indian exports in this sector ARE on the rise lately owing to downsides in other countries to a great extent — increased chemical regulations abroad, tightened environment laws, downturn in Chinese specialty chemicals market etc.

Cost of labour in China has also gone up over the last decade and eroded their competitiveness in the export markets. With manufacturing costs remaining competitive in India and demand remaining strong from end-use segments, the industry has taken a sizable lift. Combine that with the automated manufacturing facilities and commercial capabilities of players like Clean Science and we witness a substantial upswing in specialty chemicals business over the recent past.

The dependence of allied industries — personal care products, pharmaceuticals, animal feed, agrochemicals, flavours and fragrances, polymers, etc. — on specialty chemicals is also a reason to expect continued demand and sales.

A 100% FDI policy via automatic route has been useful with capital inflows into the chemicals industry. But there still remain substantial entry barriers, especially in the specialties sub-sector. Quality assurance and product innovation are crucial to cut costs in this industry. And this means sturdy capital investment in the beginning.

Chemical Cocktailwinds

Ever since the shortage of active pharmaceutical ingredients exported from China occurred last year, the diversification of domestic chemical manufacturing processes has been emphasised. In addition to fine chemicals (pharmaceutical and pesticide ingredients), there is a growing demand for niche chemicals and cosmetics, flavour/fragrance ingredients etc. Which will expand more markets for players in the industry to capitalise on.

All these factors are already pushing the opex and capex costs in the industry upwards and Indian specialty players are gaining ground in the global markets.

When it comes to Clean Science, the geopolitical current between India and China could have a role to play as well. In FY21, 37.12% of the company’s total sales came from China, which could be impacted in the event of possible trade tensions.

Chemicals are a hazardous operation. All facilities of Clean Science are currently based out of one central compound in Pune and such close concentration of all its operations in the region could impact business and financial prospects. It would be hard to contain the localisation of effects that emanate from a breach of any kind.

That being said, induced climate change has necessitated the need for building operations with high green index and minimised waste output. Above all else, Clean Science’s adoption and application of green energy in its production activity and business model are certainly a good incentives for growth and financial prospects.

(Originally published July 7th 2021 in transfin.in)