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Clean Science and Technology Limited (CSTL) - A clean and green future ahead

About the company:
Company Name : Clean Science and Technology Ltd (CSTL)
NSE Symbol : CLEAN
CMP - Rs.1564 as on Sep 2, 2021.

  • Incorporated in 2003, Clean Science and Technology Ltd is one of the leading chemical manufacturers globally and as the name suggests its a eco-friendly manufacturer. It’s a family run business.
  • It manufactures functionally critical specialty chemicals such as :
    Performance Chemicals - MEHQ, BHA, and AP
    Pharmaceutical Intermediates - Guaiacol and DCC
    FMCG Chemicals - 4-MAP and Anisole
    Total - 7 products.

Company Market share in its products:

Screenshot 2021-09-01 at 9.10.28 PM
Source : RHP, Page-127

Sales and Distribution across the globe:
Screenshot 2021-09-01 at 9.14.57 PM
Page-135

Key Financials:


Page-129

Summary of Financials:


Pg-15

Product wise Revenue:
Performance chemicals – 70% of total revenues
Pharmaceutical Intermediates –17% of revenues
FMCG chemicals – 13% of revenues


Page-131

Clean Science Unique Manufacturing Process: (Vaporisation Technology - Low cost and High Margins)
First company in the world to manufacture Anisole through Vaporisation.


Source : SOIC

Conventional Manufacturing process by other companies:


Source : SOIC

Manufacturing Facilities:
Currently There are 2 facilities for the company.
Facility 1 → Kurkumbh, Pune, Maharashtra - 7 Units
Facility 2 → Kurkumbh, Pune, Maharashtra - 4 Units
All Facilities strategically located at Kurkumbh (Maharashtra) which is close proximity to the
JNPT port from where we export majority of our products.

Facility Wise product Manufacturing:


Pg-133

Additional Facilities under pipeline: (Location is same Industrial Area as mentioned above)
Facility 3 → which is proposed to be used to manufacture Anisole and certain Performance Chemicals, including MEHQ. We have recently commenced operations in one unit of Facility III.
Facility 4 → where we intend to manufacture stabilizer and other intermediates
for application in pharmaceutical, flavors and fragrance and agriculture industries.

Capacity Utilisation :


Pg-133

Various Products and its application:


Pg-126

Customers:
Our products are used as key starting level materials, as inhibitors, or as additives, by customers, for products sold in regulated markets.
Key customers → Bayer AG, SRF Limited, Gennex Laboratories Limited, Nutriad International NV and Vinati Organics Limited

Promoters Overview:
Screenshot 2021-09-02 at 7.59.01 PM
Source : Motilal Oswal Coverage

Products Overview:
Performance Products - 70% of Total Revenues

  1. Monomethyl ether of hydroquinone (MEHQ)
  2. Butylated Hydroxy Anisole (BHA)
  3. Ascorbyl Palmitate (AP)

MEHQ:

  • MEHQ is an organic compound and a synthetic derivative of hydroquinone. Hydroquinone is basically an aromatic organic compound. CSTL is the only producer globally to manufacture MEHQ by the hydroxylation of anisole.
  • Uses : Monomers, Inks, API in the agrochemical and organic chemical manufacturing.
  • MEHQ is the intermediate of BHA and already company is forward integrated.
  • CSTL is World’s no.1 and its peers are Solvay and Camlin Fine science in No.2 and 3 globally.
  • Expected growth of this chemical for next 5 years globally: 5.8% CAGR
  • MEHQ is used as a stabilizer for acrylic acid and its salts. Global acrylic acid market exp to grow 6.6% CAGR and India Acrylic acid market exp to grow at 15.5% CAGR for the next 5 years.
  • Superabsorbent polymers (SAP) are commonly made from the polymerization of acrylic acid blended with sodium hydroxide - Uses : Infant diapers, feminine products and adult incontinence products
  • Estd 5 yrs growth of SAP globally - 5.4% CAGR
  • Current Demand of SAP is 100% in India and fully met by Imports and demand for SAP in India is expected to grow at about 11 - 12% between 2019 and 2025.
  • India Baby diapers and India Sanitary Napkin Market expected to grow 16.8% CAGR and 11.0% for the next 5 years.

BHA:

  • CSTL produce sulphur-free BHA when compared to its peers Solvay and Camlin Fine science.
  • USES: As an anti-oxidant in the food and feed industry, in animal feed and nutrition and personal care. Antioxidants are used for providing protection to essential nutrients such as vitamins, fats, and pigments from deterioration.
  • Indian animal feed market is poised to grow to ~$11B by 2025, growing at a CAGR of ~14%

Ascorbyl Palmitate - AP:

  • This chemical expected growth for next 5 years globally : 5.8% CAGR
  • Ascorbyl Palmitate (AP) is produced from ascorbic acid or vitamin C
  • Uses : Ingredient in anti-aging cosmetic products. Anti-aging products account for 17% of the total active personal care ingredients market (which is expected to grow further at a CAGR of 6.5% going forward).
  • Second largest producer in India

Pharmaceutical Intermediates –17% of revenues:

  1. Guaiacol
  2. Dicyclohexyl Carbodimide (DCC)

Guaiacol:

  • The global Guaiacol market is currently pegged at USD 309 million and is expected to grow at a CAGR of 1.3% from 2019 to 2025
  • CSTL is the third-largest producer globally and 2nd in India.
    Solvay is the largest player in world
    Camlin Fine Sciences is India’s the largest player
  • Uses : Precursor to manufacture APIs
    Used in pharmaceutical industry for the production of cough syrups.
    It is also used a key raw material for Vanillin, a food and flavour enhancer. Eg: Vanilla Ice-cream.
  • Guaiacol is used as a key starting material to produce APIs like Guaifenesin, Carvedilol, Ranolazine and Methocarbamol.

DCC:

  • CSTL began manufacturing DCC in 2020 and has become the largest DCC player in India and one of the largest players globally within just two years of commencing production.
  • CSTL manufactures sulphur-free DCC without using carbon disulphide. It acts as an anti-retroviral reagent and is primarily used in the pharmaceutical industry.
  • DCC is used as a key starting material for producing APIs like Valaciclovir, Amikacin and Glutathione, among others.
  • DCC is a powerful dehydrating agent commonly used for the preparation of amides, esters, and anhydrides. It is also used in peptide and nucleic synthesis. It is also used as a reagent in anti-retroviral drugs
  • Expected growth of this chemical for next 5 years globally : 4.9% CAGR

FMCG chemicals – 13% of revenues

  1. 4-Methoxy Acetophenone (4-MAP)
  2. Anisole

4-MAP:

  • 4-Methoxy-Acetophenone is an important spice, medicine, and makeup intermediate. 4-MAP is an aromatic chemical compound with an aroma described as sweet, fruity, nutty, and similar to vanilla. 4-MAP occasionally also has the aroma of butter or caramel.
  • The personal care industry in India is pegged at USD 14.3 billion, and expected to grow at a CAGR of 9.8% to reach USD 25 billion by 2025
  • Uses : As a cigarette additive, a fragrance, ingredient to manufacture UV Filter(most commonly used in sunscreens), and in food flavouring. It is also used as a chemical intermediate in manufacturing cosmetic additives like Avobenzone.
  • Expected growth for next 5 years globally : 3.6% CAGR
    Key Growth drivers for the next 5 years:

Anisole:

  • The global Anisole market was valued at USD 84.9 million in 2019 and expected to record a growth of 5.0% between 2019 and 2025. On a volume basis the demand of Anisole was around 34 KT growing at a CAGR of 4.5% – 4.8%.
    Uses: Anisole is a precursor to perfumes, insect pheromones, and pharmaceuticals. Synthetic anethole is formulated from anisole. The compound is mainly made synthetically and is a precursor to other synthetic compounds.
    Largest Manufacturer in world and accounting for 45% - 55% of the global capacity

Key positives:

  1. Other companies seeing china as low cost competitor but CSTL exports 30-35% to China which proves they are the low cost producers in the world and only chemical company which exports to china.
  2. Industry best EBITDA(55%), ROCE, ROE and margins.
  3. Company is continuously focus and R&D with a robust R&D Team.
  4. Company has strong relationship with customers and some customers have associated with the company for more than 10 years.
  5. Largest producer of 4 out of 7 products globally.
  6. Backward integrated especially the KSM(Key starting material) - Anisole is produced with vapor technology.

Key Risks:

  1. Litigation against one of the Director - 2 criminal cases and Litigation against the company - 2 criminal cases and 1 Tax case (23.8 lacs)
  2. Facility 4 Environment clearance will take time.
  3. Addition of new products will affect the margins.
  4. Exchange rate fluctuations may adversely affect our results of operations as our sales from exports and a significant portion of our expenditures are denominated in foreign currencies. Especially Phenol which is the largest contributor of Raw material cost.
  5. Top 10 customers contribute 48% of revenues.
  6. None of the company’s catalytic process are patented and competitors like Camlin Fine science can copy the process and capex expansion by Camlin will put margin pressure on CSTL.

Recent R&D Breakthrough on 27th August, 2021:

  • Continuing its pursuit of process innovation through catalytic technology, Clean
    Science and Technology Limited (CSTL) is pleased to announce its foray into Hindered
    Amine Light Stabilizers (HALS) series.
  • HALS series comprises a range of products which
    find application in diverse end industries including polymerization inhibitor, water
    treatment, paint industry, coatings industry etc. The estimated market size for HALS
    series globally is approximately USD 1 billion. CSTL would be the first company to
    develop HALS series in India.
  • Company has successfully developed key products in HALS series using in house R&D
    capabilities, at lab and pilot scale.
  • The ongoing capex at Unit 3 is towards existing and new products. In Unit 3, Company
    is launching first line of production dedicated towards HALS series, which is expected
    to commercialize by H2 FY2023. Besides, additional production lines will also be
    installed in Unit 4 for manufacturing products under HALS series.
    Link - 79e5a335-7772-4156-9c99-cf4a582c0e45.pdf (959.0 KB)

Disc : Invested
Please feel free to add if I miss something.

Source:
RHP document - 20210701195142_clean_science_and_technology_limitedrhp.pdf (4.7 MB)
Also I Thank @Worldlywiseinvestors and SOIC for simplifying the boring RHP in explaining the manufacturing process.

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A good Video explanation from SOIC during the IPO :

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Clean Science and Technology Earnings Call for Q1FY22

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Motilal Oswal initiates coverage - a good read

Motilal_Oswal_Clean_Science_Initiating_Coverage.pdf (4.3 MB)

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Company discovered new ranges of products
Hindered
Amine Light Stabilizers (HALS) .
Clean science & technology is First company in india.
It will be commercialize by H2 FY2023.

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Thanks @xmenwolverine for starting this thread.
The company hasn’t elaborated much on the manufacturing process for the proposed HALS products.
Is it safe to assume that even this will be forward integrated on similar lines as the performance / BHQ products ?
Since there are no patents to ‘protect’ their high margins , I think the company will have to keep expanding to maintain their edge /economies of scale ( and to stay one step ahead of competition , like camlin )

Is there any publicly available information on existing competitors ramping up plans ( eg camlin , solvay ) ?
[ Disc : not invested ]

Regards,
Abhijit.

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HALS will be a game changer & is in great demand in products where PU Foam releases free amines
Adeka Japan is a market leader
Highly profitable item

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Can anyone explain why the company has not patented a single process? Is there any risk in patenting a process as competitors can copy the process from patent filled(I have no knowledge about patents)? I could not find the reason from their DRHP. Thanks in advance

*Invested from ipo time

Management was asked this question by Cnbc, they replied stating that the whole process to get patent and then drag people to court if there is infringement is very time consuming and costly. They would rather spend this money and time in improving the existing processes.

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The end product is same from other processes. The process is not known to competitors. Why should they disclose the process and then say not to copy it for 5 to 10years instead of hiding it indefinitely? It will be much easier to protect the process by not disclosing it.

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Problem starts when an employee cognizant of the process leaves the institute and shares the secret with the new organization. Yes, there are Non-disclosure agreements but enforcing that also requires litigation.

Clean science has 36-37% revenues coming from China. Would there be any impact if consumption in china takes a hit due to Evergrande?

Exactly what I want to know now since dual control regime is there, there is power consumption rationing. If any one has any info on the customer of CSTL in China and what is impact on them of all the disruptions?

If any, it will be large impact on revenues.

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@darkhorse can you please elaborate your question. What is meant by dual control regime and and which disruption you are talking about?

CSTL is lowest cost producer for certain items and few chinese companies are also their customers.

Please read this article, gives a good sense of new regulations in China and impact on Chemical industry.

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I remember that management also said that they will hide the process secrets without applying for patent as applying for a patent means they have to disclose atleast some part of the process as part of the patent application and there is a risk of secret leaking out from this. Instead they have managed to produce these chemicals so that CSTL is supplying major percentage of global demand. So even if a competitor acquires the chemical process, and spend money to setup a facility to produce, they wont have enough buyers as CSTL is already catering to most of the global demand

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Result and Investor presentation :

Result:

Investor presentation :

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Q2FY22 Conference Call Notes
a. Company will be able to garner 10% Market share for HALS in next 3-4 years which will be approx 700Cr considering $1Billion market size
b. With the new capex they can have 900-1000Cr additional sales
c. For the new Capex Asset Turn ratio will be around 3
d. As raw material prices increased drastically they have not passed all the price rise to their customers. If the price rise sustain they will pass on the price rise to their customers
e. For new plant they have acquired 34 Acre of land and they will get EC approval probably by March. Earlier they were looking for a land of 17Acre which now they have halted and will go for other plot of 34 Acre only
f. Their target is to keep RoCE in the range of 50
g. For FY22 100Cr Capex will be done in phases. Their current plant utilization is around 70 percent

Link for Q2FY22 Conference Call

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Also from personal experience patent enforcement is a serious challenge in India. A patent we had filed for took 12 years to get approval. During this period many copycat products sprung up utilizing the little bits of information shared in the patent and started undercutting prices in the market. Their products were extremely subpar but they ended up completely destroying the product category. We were then forced to tie up with OEM’s to survive in the market and keep the product category alive. CSTL is doing the right thing by not applying for patents

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