Clean Science And Technology

Established in 2003, Clean Science and Technology Limited (CSTL) is a global leader in developing eco-friendly and cost-effective in-house catalytic processes for specialty chemicals. Its commitment to research and development, process innovation and operational scale positions CSTL as a leading manufacturer globally. This success is driven by strategic backward integration and in-house plant engineering, making CSTL one of the fastest growing and profitable specialty chemical companies. Operating three production facilities in Kurkumbh MIDC, Maharashtra, CSTL maintains high standards, with all facilities certified as zero liquid discharge.[EasyDNNnews:PaidContentStart]

It adheres to stringent quality, environmental and safety norms. The company’s dedication to innovation and environmental sustainability, coupled with a focus on technology and strategic growth, reinforces its leadership in the specialty chemical industry. CSTL aims to boost financial performance through capacity expansion, automation, strategic backward integration, yield optimisation, customer base diversification, and efficient cost management. The company’s robust business performance is reflected in its sound balance-sheet with zero debt and impressive return ratios.

Product and Segment Overview

CSTL produces critical specialty chemicals across three major segments: performance chemicals (contributing 67 per cent to revenues), pharmaceutical and agriculture intermediates (contributing around 19 per cent) and FMCG chemicals (contributing 14 per cent). Its diversified product portfolio finds applications in various industries, including personal care, food, agriculture, pharmaceuticals, water treatment, construction, and consumer goods. CSTL’s strong research and development capabilities enable it to meet global demand with innovative and sustainable processes.

Performance chemicals, the largest and most lucrative among other segments, include flagship products like MEHQ, BHA, HALS, AP and TBHQ. The company has increased capacities for MEHQ and Guaiacol by approximately 50 per cent in 2022-23. Pharmaceutical and agriculture intermediates feature key products such as Guaiacol, DCC and p-BQ. FMCG chemicals encompass Anisole and 4-MAP as the key products. Most of the company’s products are well-accepted in the market and enjoy the trust of its clients.

(Source: Clean Science and Technology, Q2FY24 Investor Presentation)

Sector Overview

The global specialty chemicals market, comprising specific molecules designed for unique applications across various industries, is poised for a 5.1 per cent CAGR from 2023 to 2030. This growth is fuelled by increased demand in automotive, construction, electronics and other sectors due to rising population, disposable income and urbanisation. The shift towards sustainable ‘green chemistry’ further contributes to market expansion, emphasising environmental responsibility.

The Asia-Pacific region dominates the market, holding a 48.5 per cent share in 2022, triggered by economic progress, industrialisation, and major contributions from China and India. The Middle East and Africa regions anticipate a 3.6 per cent CAGR by 2030, with rising demand for cosmetic chemicals in the UAE, Kuwait and Saudi Arabia. Latin America has been witnessing significant demand, particularly in automotive, transportation, chemical processing and construction.

(Source: Clean Science and Technology, Q2FY24 Investor Presentation)

Indian Specialty Chemicals Market

The Indian specialty chemicals market is rapidly expanding, projected to reach USD 64 billion by 2025, constituting 22 per cent of the country’s total chemicals market. Factors such as demand from end-user industries, urbanisation and government initiatives, including favourable policies and incentives, contribute to this growth.

Key Trends in the Indian Market

1.Focus on Research and Development - Amid global uncertainties, Indian chemical makers have an opportunity to expand globally by emphasising continuous innovation through increased research and development.

2.Rise of Green Chemicals - Growing environmental concerns are driving the adoption of green chemicals in India, supported by government initiatives. However, the challenges include the high initial cost, though partnerships with SMEs and green technology investments aim to overcome this obstacle.

3.Make in India Initiative - Launched in May 2020, the ‘Make in India’ campaign aims for self-reliance and benefits the specialty chemicals sector. Companies seek to position themselves as alternatives to China, exploring import substitution and export opportunities.

4.Demand for Specialty Chemicals - The specialty chemical manufacturing sector will experience notable growth, pushed ahead by increased demand in textiles, agriculture, construction, food processing, and personal care. The rise in population, improved living standards and busy lifestyles are contributing to the demand for specialty chemicals in various products.

The Indian specialty chemicals market demonstrates promising growth, propelled by innovation, sustainability and government-driven initiatives, aligning with global trends.

Financial Overview

Clean Science and Technology Limited boasts a market capitalisation of ₹16,125 crore. The promoters currently hold about 74.98 per cent of the shares, while FIIs and DIIs possess around 6 per cent and 5.23 per cent of the shares, respectively. The free float of the company is at 13.79 per cent. Looking at the company’s quarterly financial performance, on a consolidated basis, in Q2FY24 the company reported revenue of ₹181.1 crore which declined by 27 per cent as compared to ₹247.5 crore in Q2FY23, while the EBITDA of the company also declined by 23 per cent and stood at ₹75.4 crore as against ₹97.5 crore in Q2FY23.

Similarly, the net profit of the company plunged by 24 per cent to ₹51.9 crore as compared to ₹68.3 crore in Q2FY23. The reduction in both sales volume and realisation contributed to this decline. However, the company, driven by lower input prices and an improved product mix, expanded the EBITDA margins by 260 bps and reported a higher EBITDA margin of 42.4 per cent, surpassing the 39.8 per cent recorded in Q2FY23. Moreover, the positive EBITDA margin trend continued with PAT margins expanding by 120 bps to 29.1 per cent in Q2FY24, up from 27.9 per cent in Q2FY23.

Looking at the half yearly financial performance, on a consolidated basis, in H1FY24 the revenue of the company stood at ₹369.2 crore which declined by 23 per cent as compared to ₹481.5 crore in H1FY23, while the EBITDA of the company declined by 19 per cent and reached ₹152.1 crore as against to ₹188.8 crore in H1FY23. Similarly, the net profit of the company plunged by 20 per cent to ₹110.50 crore as compared to ₹138.6 crore in H1FY23. Additionally, upon scrutinising the financial wellbeing of the company in terms of liquidity and solvency, it is evident that the current ratio is at 5.15, and the debt-to-equity ratio is close to zero, signifying the company’s minimal debt. 

These metrics collectively indicate a robust position in terms of liquidity and solvency. Some other noteworthy performance indicators further reinforce this assessment, with a strong return on equity (ROE) at 33.2 per cent and return on capital employed (ROCE) at 44.5 per cent. Furthermore, when examining the key valuation metrics, the company’s price-toearnings (PE) multiple is 58.5 times, which is considerably lower than its historical median PE of 70.4. However, the current PE multiple of 58.5 times still remains substantially above the industry average of 31.2 times. Additionally, the EV/ EBITDA multiple stands at 39.3, which is also above its industry EV/EBITDA median of 15.96.

(Source: Clean Science and Technology, FY23 Annual Report)

Outlook

During Q2FY24, it was observed that the market persisted in being more favourable to buyers than sellers. The overhang of destocking persisted throughout Q2. Aggressive pricing of products, driven by overproduction in China, exerted downward pressure on realisation during this specific quarter. Additionally, the demand in Europe and, to some extent, in the US was notably low. During Q2FY24, the company invested ₹165 crore in capital expenditures, primarily directed toward its new subsidiary, Clean Fino-Chem Limited (CFCL). 

CFCL is anticipated to undergo water trials and commence commercial production in Q4FY24, with the total capex for CFCL amounting to approximately ₹300 crore, funded internally. In terms of new products, the company performed a groundbreaking ceremony for a chemical plant focusing on the production of pharmaceutical and agriculture intermediates, expecting these additions to contribute significantly to future revenue. The demand for Guaiacol is projected to recover in 2-3 quarters, with exploration of new markets, particularly the vanillin sector in China.

Additionally, the normalisation of destocking is estimated to take 2-3 quarters. The company aims to achieve a monthly sales target of 200 tonnes for HALS by the end of FY24. It continues to execute growth plans, expecting increased HALS volumes and securing its first European container load order for HALS. However, there remains some uncertainty regarding demand along with destocking of inventories and pricing pressure in the current environment. And so, while the financial metrics of the company are sound, the challenges that it has to face in the coming period must also be taken into consideration. We therefore recommend AVOID. 

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