| Clean Science and Technology Limited | ||||||
| Rating outlook revised to 'Positive'; Ratings Reaffirmed; Rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term bank facilities of Clean Science And Technology Limited (CSTL) to ‘Positive’ from ‘Stable’, while reaffirming the rating at ‘CRISIL A+’. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.
The revision in outlook reflects the expectation of sustained and sharp improvement in operating performance of CSTL, primarily driven by commercialisation of enhanced capacities and its dominant position in niche product categories. The company has recently enhanced capacities of its key products such as mono methyl ether of hydroquinone (MEHQ), guaiacol, butylated hydroxyanisole (BHA) and anisole by 40-50%. Steady growth in demand for these products and strong realisations should drive sharp revenue growth and ensure a healthy operating margin in the medium term.
CSTL has one of the largest capacities in the world and is largely backward integrated for its key products. This, along with integrated and cost-efficient manufacturing operations, helps the company maintain a healthy operating margin. Operating income Rs 480.3 crore and operating margin of over 45% were reported respectively, for the nine months of fiscal 2022, as against Rs 378.5 crore and 50%, respectively, in the first nine months of fiscal 2021. Revenue is estimated to grow by 20-25% for fiscal 2022. Though a steep rise in raw material prices, which are linked to crude rates, and higher power and logistics costs are expected to impact the operating margin in the second half of fiscal 2022, operating profitability is expected to remain exceptionally healthy. Also the contracts with customers are revised regularly and cost escalations are passed through, albeit with a time lag.
In a bid to diversify the product basket, CSTL has added new products – para benzoquinone (PBQ) - an import substitute, and tert-butyl hydroquinone (TBHQ), so as to increase the wallet share with existing customers in the third quarter of fiscal 2022. Further, the company is developing new hindered amines light stabilisers (HALS) series products, used in diverse end-user industries, including polymerization inhibitors, water treatment, paints and coatings. The company is commissioning a small capacity for these products at unit 3, which should be operational from the third quarter of fiscal 2023. The company has also initiated a greenfield project (unit 4) to set up a large capacity for the HALS series products, to be commissioned in the next 18-20 months. These products entirely involve a different raw material chain i.e. acetone. This would help CSTL diversify the product basket, target customers and drive growth over a longer period.
Capital expenditure (capex) undertaken to increase capacities for existing key products and add fresh capacities of PBQ and TBHQ were funded via internal accrual in fiscal 2022. The company is also expected to incur large capex of around Rs 300 crore over next two fiscals, to set up a greenfield unit 4, primarily for the new HALS series products. This capex will also be met via internal accrual and surplus liquidity.
The financial risk profile remains robust in the absence of debt, healthy cash accrual and ample liquidity.
The ratings continue to reflect the extensive experience of the management team and strong market position of CSTL in niche product categories. They also factor in the enhanced product portfolio, healthy operating efficiency and robust financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of CSTL and its four wholly owned subsidiaries.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The two-decade-long experience of the promoters, their technical know-how and focus on inventing cost-efficient processes and clean technology, have helped the company establish a strong market position. It has built a dominant presence in key products, aided by capacity expansion, a reputed clientele and the able guidance and domain expertise of its management team. Its products find application in diverse industries such as pharmaceuticals, agro-chemicals, polymer, cosmetics and animal feed. The two products, PBQ and TBHQ, which were added in the third quarter of fiscal 2022, have commenced commercial sales. The company is also developing the HALS series products, which shall be used to substitute imports and can be used mainly in master batches and other industries. While the company is leveraging its strong market position in key products by continuously enhancing capacities, additional new product categories will aid diversification of the product basket, customer base and market reach.
Operations are integrated wherein CSTL uses phenol to produce anisole, which is then used to produce MEHQ and Guaiacol, and MEHQ is in turn used to manufacture BHA. Operating margin has remained healthy between 37% and 52% over the three fiscals through March 2021. The margin is however, likely to moderate in near to medium term amidst the ramp up of the newly launched products, but shall remain healthy at over 40%, aided by higher margin fetched by the core products.
The financial risk profile is robust, marked by a debt-free balance sheet, strong accretion and maintenance of surplus liquidity. A healthy operating margin and negligible finance cost have kept the networth healthy and debt protection metrics comfortable. CSTL also had surplus liquid investment of over Rs 260 crore as on September 30, 2021. Planned capex of around Rs 300 crore, towards setting up the greenfield unit over the next 18-20 months, will be funded internally.
Weakness:
Prices of key raw materials, which are crude oil derivatives, tend to fluctuate constantly and thus, keep the operating margin under pressure. Though there is a pass-through mechanism for such fluctuations, the impact gets transferred to the customers with a time lag. |
Liquidity: Strong Liquidity is marked by expected cash accrual of over Rs 200 crore and sizeable cash and equivalent. Bank limit utilisation was also negligible over the 12 months through February 2022. The company also has surplus liquidity via unencumbered liquid investment of over Rs 260 crore and should maintain surplus liquidity despite the planned capex and exigencies, supported by healthy profitability. In the absence of any long-term debt, it can fund the capex entirely through surplus liquidity or internal accrual. An unleveraged capital structure also provides financial flexibility to raise debt if needed. |
Outlook: Positive CSTL will continue to benefit from its strong market position in key product categories, healthy operating efficiency and wider product basket. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company CSTL was established in 2006, by Mr Ashok R Boob and his family members. The company has plants in Kurkumbh, Maharashtra, and manufactures specialty chemicals such as MEHQ, guaiacol, 4-methoxy acetophenone (4-MAP) and BHA. It has recently developed PBQ and TBHQ in the third quarter of fiscal 2022. The company was listed on the stock exchanges in July 2021, wherein the IPO was entirely an offer for sale by the existing promoters and other shareholders.
Recently, CSTL has formed a new wholly owned subsidiary, Clean Fino-Chem Ltd and its greenfield project for the new unit will be undertaken in the subsidiary.
For the nine month period ended December 31, 2021, CSTL reported a net profit of 166 crore on net sales of Rs 480 crore, compared with Rs 145 crore and Rs 379 crore for the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||
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This Annexure has been updated on 20-Apr-22 in line with the lender-wise facility details as on 20-Apr-22 received from the rated entity.
Criteria Details
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