Verdict: Subscribe to this High-Margin Leader

Rs 1,547 cr IPO: OFS mainly by promoters (no fresh issue)

IPO Date: Wed 7^th Jul to Fri 9^th Jul 2021

Price band: Rs. 880-900 per share

MCap (at upper band): Rs. 9,560 cr, implying 16% dilution

Listing Date: 19^th July 2021

Niche Specialty Chemicals Maker

Clean Science is the world’s largest manufacturer of performance chemicals, like MEHQ, BHA, and FMCG chemicals 4-MAP and anisole, with combined manufacturing capacity of 29,900 TPA. 50% of Rs. 512 cr revenue is derived from MEHQ, and another 20% from BHA and AP, all of which are high margin and fast growing performance chemicals, with 30% revenue from India, 35% from China and 25% from US, Europe. It is undertaking brownfield and greenfield expansion for 50% capacity increase over 3 years, as also, has Rs. 55 cr capital work-in-progress, as of 31.3.21, on Rs. 183 cr fixed assets, indicating growth visibility.

Strong Growth Coupled with Industry-Leading Margins

Between FY19-21, manufacturing capacity rose 40%, with utilization in performance chemical segment (MEHQ, BHA, AP) improving from 56% to 74%, which lead to 31% revenue CAGR, from Rs. 393 cr in FY19 to Rs. 512 cr in FY21. Backward integration, higher volume led operating leverage and switching to a cost competitive vapour-phase anisol from phenol (over liquid-phase) strengthened EBITDA margin from 38% in FY19 to 56% in FY21, with PAT doubling to Rs. 198 cr, from Rs. 98 cr in FY19. FY21 profits were partly boosted by lower phenol prices (crude derived) and Rs. 11 cr forex gains, indicating long term EBITDA margins may tend more towards FY20’s 47%, which is nevertheless very attractive, as peers’ range between 18-38%. On Rs. 10.6 cr equity (FV Re. 1 each), EPS for FY21 stood at Rs. 18.7, with net margin of 39%. Company remains debt free with surplus cash of Rs. 248 cr or Rs. 23 per share.

Attractive Pricing

At Rs. 900, company’s m cap will be Rs.9,560 cr, leading to PE multiple of 48 times on FY21 earnings, which may appear high in absolute terms, but industry-leading margins, high growth visibility and 37% RoE leave room for upside from hereon too.

Camlin Fine Sciences, having some over-lapping  product profile but only 5% net margin is ruling at PE multiple of 53x, while other chemical peers with either high margin or high growth like Fine Organics, Vinati Organics, Anupam Rasayan, Rossari are ruling at PE multiple above 75x. Company enjoys twin advantage of high growth, as well as superior margins.

Conclusion:

We recommend ‘subscribe’ to the IPO as company fundamentals are extremely healthy indicating high scope for listing gains, as also a good long term pick.

Grey Market Premium (GMP) of Clean Science: Grey Market Premium of Clean Science is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.