by Aakash Athawasya
A dominant investment theme in FY21 was specialty chemicals. Due to rising demand from the pharmaceutical, agrochemical, and FMCG industries, Indian chemical makers gained, as Chinese supply of chemicals decreased. Now, as we enter the second quarter of FY22, a specialty chemical maker is going public.
The initial public offering (IPO) of Pune-based Clean Science & Technology (Clean Science) opened on July 7, the same day as G R Infraprojects. On July 6, Clean Science raised Rs 464 crore (30% of the issue) from anchor investors at Rs 900 per share. Investors took strongly to the company as the IPO was fully subscribed on day one of the bidding process.
Clean Science makes performance chemicals like mequinol, butylated hydroxyanisole, and acetophenone. These chemicals are used by agrochemical, paint, consumer electronics, and plastic companies. Clean Science held a 44% market share in the global performance chemical market by manufacturing capacity in FY21. It also produces intermediates for the pharmaceutical industry and preservatives and chemicals used by FMCG companies for packaged food and personal care products.
Clean Science occupies a strong position in the competitive specialty chemical market in India. With its high margins, low debt, steady cash flows, and cheap valuations will Clean Science add to the gusto of the specialty chemical market?
Promoters will make Rs 1,546 crore through the OFS
Clean Science was started by Ashok Ramnarayan and Krishnakumar Ramnarayan who along with Siddhartha Sikchi, and Parth Maheshwari are promoters of the company. The company’s promoter group members include family members of these four.
The specialty chemical company’s IPO issue size is Rs 1,546 crore and is a complete offer for sale (OFS) of 1.7 crore equity shares. Together, the promoters and the promoter group hold 95% of the company. Post the IPO, the promoters and the promoter group will hold 78% of the firm, and public shareholders will hold 16%.
The IPO price band is Rs 880-900 per share. Post the issue, at the upper end of the price band, Clean Science will be valued at Rs 9,500 crore.
At the upper end of the price band, the company is valued at 48.2 times its FY21 earnings. This is cheaper than listed peers Navin Fluorine International, Vinati Organics, and Pidilite Industries in the commodity and specialty chemical industry.
A maker of export-focused performance chemicals
Performance products are its biggest revenue generator, contributing over two-thirds of FY21 revenue. The company exports nearly 70% of its products mainly to China, the United States of America, Canada, South Africa, and Australia.
In FY20, the company’s two main segments, performance chemicals and pharmaceutical intermediates only grew by 8-9% YoY. During the first wave of Covid-19, many countries diversified their supply chains away from China due to a strict lockdown in the country. This opened the door for Indian pharmaceutical and specialty chemical companies in FY21.
In FY21, revenue from the sale of performance chemicals rose by 30% led by the agrochemical sector as export demand rose. Pharmaceutical intermediates’ revenues also grew by 29% YoY as the domestic pharmaceutical industry also saw higher export demand for Covid-19 related drugs, respiratory drugs, and diabetic drugs.
Between FY19-21, domestic revenue share in total revenues increased to 31% from 26%. This was led by rising demand from local pharma companies and agrochemical companies, which helped domestic revenues rise 32% YoY in FY21.
Exports to China rose by 29% in FY21, as the government closed several chemical factories in the country due to rising pollution levels. North American exports jumped 57% to Rs 58 crore (11% of total revenue) as companies in the US and Canada preferred Indian specialty chemicals. Exports to Europe fell by 10% in the year due to supply chain disruptions.
Steady growth in revenue and profits, margins beat industry peers
In FY21, revenues were Rs 512.4 crore, a 22% growth YoY. This growth was driven by higher domestic sales of performance chemicals. Net profits grew by 42% in FY21 to Rs 198.3 crore because of a 25% decrease in finance costs in the year.
Clean Science’s earnings before interest, tax, depreciation, and amortization (EBITDA) was Rs 284 crore, a 45% growth YoY. EBITDA margins were 55.5% in FY21, an 8.8 percentage points increase over the previous year. The growth in EBITDA was because Clean Science managed to control its power generation-related costs. In FY21, power generation costs remained flat at Rs 35 crore, comprising 12% of operating expenses (down from 14% of operating expenses in FY20). The company said this was because it sourced electricity from its solar power plants (5.42 megawatt capacity).
Several chemical companies’ margins improved in the previous fiscal year due to rising revenues and lower costs. This was because companies in the pharmaceutical and agrochemical sectors switched to the domestic supply of specialty and commodity chemicals over Chinese specialty chemicals. Clean Sciences’ has the highest EBITDA margins in comparison to listed chemical players.
The company’s return-on-equity (RoE) was 37% in FY21, second only to commodity chemical maker Deepak Nitrite.
Debt rises in FY21, but debt-to-equity in control
In FY21, Clean Science’s total debt rose by 37% to Rs 120.3 crore. The company took on debt to fund its working capital, as capital expenditure (capex) was funded from the company’s internal cash flows. Clean Science’s debt-to-equity ratio was 0.22 in FY21, down from 0.26 in FY21.
In FY21, Clean Science’s operating cash flows were Rs 193 crore, a 20% growth YoY. Capex during the year grew by 67% to Rs 84 crore, in order to expand its solar power plant’s capacity. Free cash flows remained flat in FY21 at Rs 108.4 crore despite an increase in capex.
Pharmaceutical and agrochemical PLI boost
Clean Science provides specialty chemicals to two sectors which are set to grow at a steady pace in the next few years. It supplies intermediates to the global pharmaceutical sector, which is valued at $1.3 trillion (Rs 96 lakh crore) and is expected to grow at a compounded annual growth rate (CAGR) of 5% between FY 21-25. The domestic pharmaceutical sector market, which was Clean Science’s focus in FY21, is worth $58 billion (Rs 4.3 lakh crore) and will grow at a greater CAGR of 10% backed by export demand from FY21-25.
The company supplies performance chemicals to agrochemical companies in India and China. These two countries make up 35% of the world’s agrochemical exports. The global agrochemical market is valued at $62.5 billion (Rs 4.6 lakh crore) and is expected to grow at a CAGR of 6.6% from FY 21-25.
Clean Science has a strong 44% market share in the performance chemical market. This segment contributes nearly 70% of revenues and grew at a 12% CAGR between FY19-21. The pharmaceutical industry was approved for the production linked incentive (PLI) scheme in FY21. The agrochemical and specialty chemical sectors are also likely to be approved under the PLI scheme to boost domestic manufacturing. This points to a favourable growth outlook for Clean Science.
The company’s high margins and cost control over the years indicate steady and industry-beating operational efficiency. Since debt is low, and cash flows are positive, the company has adequate means to fund future capex. The specialty chemical market is competitive with good quality companies. However, Clean Science’s strong performance chemicals portfolio, high margins, and cheap valuations might pique investors’ interest.