IPO update: Clean Science and Technology

Clean Science and Technology (CST) came out with its IPO about two months ago. Value Research's analysis of the IPO can be found here. This follow-up article focuses on the IPO's performance, post-IPO events, and changes in its valuation since then.

Our analysis of the IPO
We gave a score of 21 out of 27 to this speciality-chemical player when it came out with its IPO. The score was based on the company being one of the largest and leading producers in the world for its primary products such as MEHQ, BHA, guaiacol, anisole, and others. The company's products are used as the critical starting-level materials, like inhibitors or additives by its customers, for making finished products. The criticality of products leads to long-term relationships and high repeat usage between the company and the customers.

Unlike other chemical players, it develops and uses eco-friendly chemistries based on catalytic technology. 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 company's strategy for growth includes developing new products with applications across multiple growing industries, focusing on organic growth through expanding manufacturing capacities, increasing the yield of existing processes and developing new catalysts through innovation and R&D, and expanding footprints by adding new customers across geographies for existing products.

Our rating of the company was based on the following:

• Out of the 10 business metrics, the company did well on six
• It did well on all the six management-quality-related metrics
• It did well on all eight financial metrics
• Out of the three valuation-related metrics, it did clear just one metric

Stock performance since listing
The company saw a good response to its IPO, which was oversubscribed by more than 93 times. The qualified institutional buyers' (QIB) portion was oversubscribed by 156 times, while the non-institutional investors' portion was oversubscribed by 206 times and the retail portion by 9 times.

CST had a stellar debut on the stock exchanges, with the shares listing at a premium of 98 per cent over its issue price, opening at Rs 1,784. However, post listing, the stock quickly dived to Rs 1,430 within a month, which was still more than 50 per cent above its issue price of Rs 900.

Business performance
The company has reported its quarterly results for the June quarter, with a 29.6 per cent YoY growth in revenues at Rs 146.3 crore. As compared to the previous quarter, revenues were up by 9.3 per cent. The net profit for the June quarter was up by 30.3 per cent YoY and stood at Rs 54.6 crore and increased by 2.8 per cent compared to the previous quarter.

Also, the company recently announced an update on its R&D breakthrough. CST announced its foray into Hindered Amine Light Stabilizers (HALS) series, continuing its pursuit of process innovation through catalytic technology. HALS series comprises a range of products that find applications in diverse end industries, including polymerisation inhibitor, water treatment, paint industry, coatings industry, etc. The estimated market size for HALS series globally is approximately $1 billion. CST will be the first company to develop HALS in India.

The ongoing capex at Unit 3 is towards existing and new products. In Unit 3, the company is launching the first production line dedicated to the HALS series, which is expected to commercialise by H2 FY2023. Besides, additional production lines will also be installed in Unit 4 for manufacturing products under the HALS series.

What to do now?
The company has a strong balance sheet, higher net profit margin (36.9 per cent), and higher return on equity (36.8 per cent) compared to its peers. The working capital cycle for the company came down to 47 days in FY21 from 69 days in FY19. Moreover, it is free from short-term debt and has ample current assets in the form of investments (Rs 232 crore as of FY21) to meet working capital needs.

The company has increased its topline at a CAGR of 14.14 per cent over FY19-FY21. Since its listing in July, the company has traded at a P/E between 76-98 times. While the company does seem to offer promising growth potential, it currently trades at a P/E of just over 97 times compared to the median P/E of about 57 times for its peer group. Thus, it seems to be overpriced at its current valuation.