Clean Science and Technology Limited IPO

The Clean Science and Technology Limited IPO issue will open on Wednesday i.e., July 7th, 2021 and close on July 9th, 2021. The price band for the offering has been fixed at Rs. 880-900 a share. The initial public offering will be a complete offer for sale of Rs. 1,547 crore by existing shareholders including promoters Ashok Ramnarayan Boob, Krishnakumar Ramnarayan Boob, Siddhartha Ashok Sikchi, and Parth Ashok Maheshwari.

Incorporated in 2003, Clean Science and Technology Limited manufactures critical specialty chemicals such as performance chemicals (MEHQ, BHA, AP), pharmaceutical intermediates (Guaiacol, DCC), and FMCG chemicals (4- MAP and Anisole). The company’s products are used as key starting level materials, as inhibitors, or as additives, by customers, for products sold in regulated markets. Key customers include Bayer AG, SRF Ltd, Gennex Laboratories, Nutriad International NV and Vinati Organics. It has two certified production facilities with a combined installed capacity of 29,900 MTPA in India strategically in Kurkumbh (Maharashtra), in close proximity to the JNPT port.

The differentiation in the process of manufacturing between Clean Science and Technology Limited and its peers has helped the company offer products at a competitive price and thereby gain meaningful market share across its product portfolio. Going ahead, it plans to expand overall capacity of existing products, which should translate into improvement in the market share further. Moreover, it also plans to set up a fourth unit, which could have asset turn in the similar range of present business segments with decent OPM visibility. The management has not outlined any capex details yet. Thus, any announcement can improve revenue visibility further. Moreover, it recorded revenue growth of 14% CAGR in FY19-21 supported by higher volume growth across the segments. With changes in the anisole manufacturing technology, it was able to improve gross margins to a certain extent, and thereby OPM. Going ahead, with sustainability in gross margins along with better working capital management and operating leverage likely to play out, it can aid FCF considerably. In turn, this would help the company to incur capex from internal accruals. Since newer businesses should have better/similar RoCE, incremental cash can sustain group RoCE and thereby help it to demand better valuations ahead.

At Rs. 900, the stock is available at 48.2x PER of FY21. We expect aforementioned rational could translate into better performance over the medium to long run. However, there is one prominent key risk – MEHQ forms around 50% to the overall revenue. Any adversity in the demand outlook from end user industry or increase in the competition can impede growth outlook of the business. We have a SUBSCRIBE rating to the issue.