Clean Science and Technology IPO: Information analysis

Incorporated in 2004, Clean Science and Technology (CST) is a speciality-chemical player dealing in niche chemical compounds. Unlike other chemical players, it develops and uses eco-friendly chemistries based on catalytic technology. Its products are used as polymerisation inhibitors, intermediates for agrochemicals and pharmaceuticals, anti-oxidants, UV blockers, anti-retroviral reagents and others. Although CST focuses on niche products, it is the largest producer of primary products, including MEHQ, BHA and others. The company exports its products to various regulated markets, such as China, Europe and the US. Exports account for 70 per cent of the company's total revenue. The Indian speciality-chemicals industry is expected to grow to $147 bn from $78 bn in 2019, owing to factors like the introduction of stringent environmental norms in China, the availability of cheap labour and the R&D skillset in India, the Indian government's export push, amongst others. To capitalise on the opportunity, CST is augmenting its current production capacity of 29,900 MT, which will be funded internally. The company also plans to introduce new products with varied applications across industries. Strengths Over the last few years, the company has successfully backward-integrated its processes. This had led to margin improvement (the EBITDA margin of 55.5 per cent in FY21 as compared to 37.5 per cent in FY19). For many of its products such as MEHQ, BHA and others, the company is either the largest or one of the leading manufacturers in the world. It enables the company to compete effectively against both existing and new entrants. The company has developed clean chemistries based on catalytic processes. Therefore, most of its current production processes release either zero liquid or only water as the discharge. In speciality chemicals, the entire process right from product ideation to commercialisation takes two-three years and companies need to work closely with their customers. Hence, it leads to higher switching costs for customers. Risks/weaknesses MEHQ contributes 46-48 per cent to the company's top line, leading to a high product concentration. R&D expense, accounting for around 0.1-0.2 per cent of the company's total revenue, is lower than that of industry-leading players (PI Industries: 3-4 per cent). Further, owing to the absence of any patents or contracts with global innovators, the company does not have any enduring competitive advantage. Customer-concentration risk poses a threat to the company, as in FY21, t