In the global landscape of the chemical sector, where Chinese players dominate the market, here at home, there’s one company that is a global market leader in most of the chemicals it produces!
In fact, not only is it vending off competition from Chinese players, it is actually supplying to Chinas as well.
However, despite this impressive feat, Clean Science’s stock price has crashed almost 50% from its peak in December 2021.
So what’s going on with this clean company with rather murky stock returns?
What is Clean Science?
Incorporated in 2003, Clean Science manufactures functionally critical specialty chemicals across 3 main segments - Performance Chemicals, Pharmaceutical Intermediates, and FMCG Chemicals.
Basically, it makes chemicals that have varied, but critical uses - they are used from your food to your dog’s food, from lipsticks to diapers and sanitary pads, and some are even used in your medicines to make them taste less bitter.
Now you know why the use of “Clean” and in the company’s name! Here’s a sneak peek into their magic potions:
What Makes Clean Science so Special?
For any chemical company, it is critical to do two things right - keep prices high, and keep costs low.
For Clean Science, it has been making critical and specialty chemicals, which ensures it has some pricing power. On the costs front:
For starters, the company is more or less self-reliant on its key starting materials (KSM), make its value chain fully integrated. For instance, the company primarily produces Anisole, a widely used KSM in its products, completely in-house.
Not only that, it has developed something called “Vaporisation Technology," which is the most cost-effective method, making it the only company in the world to use this method.
The results? The company’s products are not just competitive but often cheaper than those of Chinese players, enabling it to capture 22% of its revenue from the Chinese market itself.
Additionally, this also helps the company in generating Industry beating EBITDA margins of 45%. Talk about hitting two birds with one stone!
Why the Stock Price Dropped?
Still the question remains! Why did the stock halve in value? Well, there are few reasons behind it:
When Clean Science debuted on the stock market in July 2021, it was amidst a chemical sector boom. Investors were enamoured by its superior margins, and the stock quickly became the poster child of the sector. This euphoria drove the stock price to astronomical levels, peaking at around 140x its price-to-earnings ratio.
However, no matter how magical a company might be, it’s not immune to the broader industry cycles. The chemical sector experienced significant de-stocking globally during 2023, coupled with global demand downturn because of slowing down of major economies such as China and Europe.
Clean Science wasn't spared, experiencing a 15% drop in FY24 revenue compared to FY23, driven by lower price realisation. However, its fully integrated manufacturing process helped maintain margins, with EBITDA margins dipping just 1%, highlighting its business model's resilience.
Signs of Recovery
Amidst the gloom, there’s a glimmer of hope as Clean Science's 4QFY24 results indicate a recovery path.
The company saw a 16% QoQ sales growth, driven by a 23% volume boost, offset by a 7% decline in realisation
On a YoY basis, 4Q sales rose by 4%, highlighting a rebound in volumes and underscoring client stickiness towards Clean Science
This volume-led recovery suggests strong underlying demand for the company’s products, promising a positive outlook for future performance
Expanding Beyond Flagship Products
Clean Science isn’t resting on its laurels. Recognising the need to diversify its revenue streams, the company has embarked on a significant expansion plan.
Currently, around 75% of its revenues come from flagship products like MEHQ, BHA, and Guaiacol.
To reduce this dependency, the company has invested Rs. 235 crore in a new product line - Hindered Amine Light Stabilisers (HALS), primarily used in water treatment plant for purification.
This performance chemical has no non-Chinese manufacturers, giving Clean Science a competitive edge in the Indian market, where it already supplies 50% of the demand and aims to capture around 80% of the Indian market.
The HALS product line has the potential to generate Rs. 800 crore in revenue at peak utilisation, a significant boost considering the company’s FY24 revenue was around Rs. 800 crore.
Additionally, Clean Science is investing Rs. 30 crore in expanding its pharma chemicals, expected to contribute Rs. 100 crore to the top-line, the facility is expected to start from 3QFY25.
⭐ These new expansion plans are forecasted to drive the revenue growth at a CAGR of 32% for the next two years, as against a 16% drop in FY24.
Clear Skies Ahead?
Clean Science has weathered significant challenges, some operational and others beyond its control. However, the company appears to be on the path to recovery, with promising volume growth and strategic expansion plans.
It’s worth noting that the initial phases of new product launches often come with lower margins, which might lead to some margin contraction. Despite this, Clean Science remains a top contender in the sector.
When compared to its peers, Clean Science’s performance and potential are impressive:
Company | Revenue Growth - Next 2 Years | EBITDA Margins | ROCE | Capex/Revenue | 1-year Forward P/E |
Clean Science & Technology | 32% | 40%-45% | 30% | 30% | 50x |
Navin Fluorine | 26% | 20%-25% | 15% | 14% | 52x |
Vinati Organics | 23% | 24%-27% | 20% | 24% | 47x |
Deepak Nitrite | 10% | 15%-17% | 22% | 15% | 40x |
It’s evident that Clean Science’s premium valuation isn’t entirely unfounded. With ambitious expansion plans and a resilient business model, the company’s stock valuation could stay strong or even climb higher.
The drop in stock price was not totally unwarranted, however despite facing significant challenges, the company has shown resilience by maintaining margins and adapting to market conditions.
With signs of recovery and potential growth, especially through new product expansions, it's worth keeping an eye on this clean player as it navigates the industry's complexities.
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