Thread by @caswapnilkabra

A thread to understand the business of 'Clean Science and Technology Limited' and the reasons as to why it is number 1 in many of its products. 👇🧵
#cleanscience #cleanscienceipo

First, let us understand the products the company makes.
The company has MEHQ, BHA, Guaiacol, Anisole, 4-MAP, DCC and L-ascorbyl in its portfolio.

Before you yawn reading the unpronounceable chemical names, let me cut the mumbo jumbo and simplify this.

Let us understand the applications of these products. MEHQ is used
👉in Dermatology,
👉for making BHA,
👉in Agrochemicals,
👉in ink industry,
👉in monomers and polymers for diapers and sanitary pads, etc.
The company ranks 1st in the world and 1st in India here.

BHA is used
👉in Animal Feed Additive
👉in Food Packaging.
The company ranks 1st in the world and 1st in India here.

Both MEHQ and BHA are performance chemicals with high margin. The company derives 70% of its revenue from these.

Guaiacol is used in Pharma industry for cough syrup. The peers however supply it to industries for vanilla production hence they have lesser margin compared to Clean Science.

For Guaiacol, the company ranks 2nd in the world and in India.

Anisole is the Key Starting Material which is then used in making MEHQ, 4-MAP, BHA, Guaiacol. It ranks 1st in the world and in India for Anisole.

4-MAP is used in
👉cosmetics
👉sunscreen.
It ranks 1st in the world and in India here too.

Anisole and 4-MAP constitute 12% of the revenue of the company.

DCC is a product that finds application in Pharma industry for Antiretroviral drugs used in the treatment of HIV.
It is again the largest company in the world and in India for DCC.

l-Ascorbyl is used in
👉Breakfast
👉Cosmetics
👉 Complements BHA
It is 2nd in the world and India for this product.

Let us now understand why this company enjoys huge margins compared to its peers.
Let us focus on the competitive advantages of Clean Science.

The 1st competitive advantage as clarified by the management in the pre ipo discussion was the use of Guaiacol.
Company sells this to pharma companies making cough syrup. This is a high margin sector. The peers on the other hand sell it for making vanilla, a low margin sector.

The 2nd reason for high margin is 'Change in Revenue Mix'.
Performance chemicals like MEHQ, which are high margin products now constitute 64.9% of company's revenue. This was just 60.39% in 2018.

The 3rd and the most interesting reason is backward integration.
'Anisole' is the key starting material for many products that the company manufactures. This was earlier outsourced by the company.

In 2018, the company started making Anisole inhouse using 'Liquid Phase Technology'.
Due the this the margins started expanding as it need not depend on suppliers for Anisole.

In 2019, the company started producing Anisole using 'Vapourization Method', which is much cost effective than the earlier method.
Therefore, the margins expanded more.

The company recently tripled its capacity for Anisole and now it is the largest manufacturer of this key starting material in the world.
Owing to huge economies of scale, the company is now able to make the key starting material at least possible cost.

Anisole is then used to make products like MEHQ, BHA, 4-MAP, Guaiacol.
Imagine how much cost the company is now able to save by this backward integration!
This acts as barrier to entry for competitors as no one would be able to compare in terms of low cost. That's the moat.

4th competitive advantage for the company is 'Forward Integration'.
MEHQ is used to make BHA. As MEHQ is made with low cost, BHA is too cost effective.
That's the reason company is able to export more than 30% to Chinese markets!

Chinese are known for low cost manufacturing. Imagine a company selling to China.
It clearly means that the company is able to make products at cheapest price possible.

The content for this thread was majorly taken from the pre ipo discussion by management of Clean Science and Technology Ltd.

Special thanks to @ishmohit1, @soicfinance for making an amazing and informative video that inspired this thread.

Also to add, the management believes that the margins are sustainable.
When MEHQ production began in 2008-09, the prices were around 7.5-8 USD and in 2021 too the prices are around 8.25-8.5 USD.
This signifies that the margins have expanded because of backward integration.

From the notes that I made,

From the notes that I made,