Fortune Scrip

Published: Jan 15, 2022
Updated: Jan 15, 2022

CLEAN SCIENCE AND TECHNOLOGY - Riding demand for speciality chemicals

This time we have selected a speciality chemicals company which has very high growth potential as the Fortune Scrip for the fortnight. Maharashtra-based Clean Science, with its plant at Kurkumbh in Pune district, manufactures critical speciality chemicals, including performance chemicals (MeHQ, BHA, API), pharmaceutical intermediates (such as guaiacol and DCC) and FMCG chemicals (like 4-MAP and anisole). These products are used as key starters, inhibitors or additives by customers for products sold in regulated markets. The company’s client list includes Bayer AG, SRF, Gennex NV and Vianti Organics. It has two modern manufacturing facilities at Kurkumbh with a combined installed capacity of 29,900 mtpa. Each of these two facilities has an onsite R&D unit, a quality control department, a warehouse and an effluent treatment system that makes them zero liquid discharge (ZLD) units.

The domestic market accounts for 33 per cent of the company’s revenues while the balance of 67 per cent comes from China, Europe, the US, Korea, Taiwan and Japan. As the plants are strategically located at Kurkumbh near the JNPT port, export shipments are very convenient. What is more, the company has developed strong long-term relationships with its key customers overseas.

Needless to say, Clean Science has a strong set of financials. During the last six years, its sales turnover has expanded over three and a half times – from Rs 140 crore in fiscal 2016 to Rs 512 crore in fiscal 2021, with the profit at net level spurting more than seven and a half times – from Rs 27 crore to Rs 198 crore in the same period. The company’s financial position is very strong, with reserves at the end of March 2021 standing at Rs 638 crore – over 57 times its tiny equity capital of Rs 11 crore. The company has a very healthy balance sheet with a debt-free status. It has a good return on equity (RoE), with the track record for the last 3 years being 44.57 per cent. And it has been maintaining a healthy dividend payout of 50.24 per cent.

However, we have not picked this scrip for its past laurels. Its future prospects are all the more exciting and promising. Consider:

Chemicals in general and speciality chemicals in particular are bullish on account of the ‘China plus one’ policy adopted by the West. India is widely accepted as a manufacturer of speciality chemicals of high quality and timely delivery. Clean Science is widely admired for developing and commercializing certain performance chemicals like monomethyl ether of hydro quinone (MEHQ) and butylated hydroxy anisole (BHA), using eco-friendly and cost-competitive processes. Overseas demand for the company’s products is on the rise and exports today contribute about 67 per cent of its revenues. By now the company has emerged as a leading supplier of speciality chemicals like ansole, 4-MAP, MEHQ, BHA, DCC etc.

The company is an undisputed global market leader in MEHQ BHA, 4-MAP and anisole, and among the top three in other product categories (MEHQ is the largest contributor to sales, accounting for 48 per cent of total revenues). The company holds a 52 per cent global marketshare in this product category and expects this share to expand to 65 per cent in the next 2 to 3 years. The company has similar aspirations in other product categories as well. During the last five years, it has posted a revenue CAGR of 29 per cent due to its strong R&D in the catalytic process, which has brought marketshare gains across product segments as well as higher yields. According to the management, several global markets are still under-penetrated, which will allow it to gain marketshare going forward. It also plans to launch new products in the existing value chain, which will help increase its wallet share with existing customers.

Strong R&D initiatives back robust margins. The company’s R&D initiatives have helped it improve overall productivity by optimizing use of raw material and limiting effluents from processes. Its alternate chemistry and in-house catalysis have allowed better conversion rates from phenol to anisole and from anisole to MEHQ, resulting in higher product yields. The company manufactures anisole via the vapour-phase technology, which discharges only water, thus reducing the cost involved in treating effluents. The starting price point of raw materials is lower for the company. This helps it operate at a higher gross margin than its peers and allows it to bear fluctuations in raw material. Notably, it had a gross margin of 69.2 per cent in fiscal 2020, which has shot up to 75.9 per cent in fiscal 2021.

With a view to meeting the rising demand for its products in its existing and new markets and raising its marketshare, the company has planned an ambitious Rs 400-crore expansion programme to set up manufacturing facilities 3 and 4 near the existing two facilities at Kurkumbh. Thus, the manufacturing capacity, which was doubled to 29,900 mtpa between 2017 and 2021, will be raised further to 50,000 mtpa by fiscal 2023 with the commissioning of facility 3 by the end of the third quarter of fiscal 2022 and facility 4 by the end of fiscal 2023. In order to implement this expansion path, the company has entered into an agreement to acquire plot No. D-2 MIDC at Kurkumbh, admeasuring 32,681.50 sq metres, along with a 14,065 sq metre building, from Samrat Pulp and Paper Pvt Ltd for a consideration of Rs 32.01 crore.

Little wonder that the company’s stocks, which were offered at around Rs 800 per piece in July 2021, are now quoted around Rs 2590. Viewed in the context of the rising marketshare of the company’s products, the upswing in profit margins and an ambitious expansion programme, the stock price will remain strong and move up further in the coming years. Discerning investors should include this stock in their portfolio so that they can reap a rich harvest going ahead.

- Savyasachi