In this article we have done the fundamental analysis of Clean Science Technology Ltd (CSTL) & Camlin Fine Sciences based on the concept of competitive advantage.
A business is said to be at a competitive advantage due to various factors
- Low Cost Advantage – Economies of Scale
- Differentiated Products
- Superior Technology
- Brand Image – Pricing Power
In this article we have analysed both of these companies based on their technology to manufacture different chemical products and tried to solve following question – Why Clean Science Technology Ltd (CSTL) able to command higher valuations, better margins and better ROCE compared to Camlin Fine Sciences (CFS)?
Introduction
Clean Science Technology Ltd (CSTL) is a fine and specialty chemical manufacturing company, with innovative chemical processes, developed in-house. Clean Science Technology Ltd shares were listed at a premium of 95 percent to their issue price of Rs.900. The current share price of Clean Science Technology Ltd is Rs.1720
Camlin Fine Sciences (CFS) is the leading integrated manufacturer of the most preferred traditional antioxidants (Shelf-Life Solutions). Camlin Fine Sciences’ share price today is Rs.112.2
Value Chain
Clean Science Technology Ltd and Camlin Fine Science Ltd manufacture performance chemicals and food antioxidant products; however, one has a competitive advantage over the other because they use different manufacturing methods. According to the value chain, Clean Science Technology Ltd (CSTL) manufactures antioxidant products via the anisole route, whereas Camlin Fine Sciences (CFS) uses the hydroquinone route. Clean Science Technology Ltd (CSTL) can achieve operating margins of more than 50% by using the anisole route, whereas Camlin Fine Sciences (CFS) is struggling to maintain margins of 15%. So, why not switch to the anisole route and abandon the hydroquinone route?
Superior Technology
Traditionally, anisole was produced by reacting sodium hydroxide with phenols; however, Clean Science Technology Ltd (CSTL) has developed proprietary technology to produce anisole through vapor phase technology. The phenol is vaporized in the presence of a catalyst known only to Clean Science Technology Ltd (CSTL), yielding their key product anisole. It is a one-step reaction, so the production cost is low. The anisole is then used to make value-added products such as MEHQ and BHA.
Camlin’s fine sciences lack knowledge of catalyst and vapor phase technology and continue to manufacture MEHQ from hydroquinone in the traditional way. One significant disadvantage of producing hydroquinone from phenols is that a by-product, catechol, is produced in large quantities. Catechol has fewer applications than MEHQ and BHA, so demand is low and inventory is growing. If the demand for hydroquinone rises, so will the production of catechol.
TBHQ and PBQ are being introduced by Clean Science Technology Ltd (CSTL). TBHQ is a product in the antioxidant basket that is being requested by an existing customer so that all antioxidants can be obtained from a single supplier. As a result, existing customers’ wallet share will increase, and existing competitors’ market share will decrease. However, both products will be produced via the hydroquinone route rather than the anisole route, using catalytic oxidation technology. Clean Science Technology Ltd (CSTL) is under no plans to backward integrate the hydroquinone value chain because of the extra by-product alongside i.e., catechol. Directly procuring hydroquinone from the open market is economically beneficial as it is a commodity product.
PBQ is imported in India and the manufacturing of the product will result in import substitution. Clean Science Technology Ltd (CSTL) is working on a PTZ product that is an important antioxidant, but they have not yet been successful in developing the technology.
Risk To Reward ?
The Clean Science Technology Ltd (CSTL) has a competitive advantage over Camlin Fine Sciences (CFS) due to technocrat promoters and expertise in catalytic chemistry. The picture of clean science looks positive, however, one should not forget Charlie Munger’s “Inversion” mental model.
Clean Science Technology Ltd (CSTL’s) technology is not patented, making them vulnerable to the threat of technological infringement. Also, according to recent Camlin fine science management updates, Camlin Fine Sciences (CFS) is working on an anisole route to manufacture their products. Camlin Fine Sciences (CFS) has also relocated manufacturing units from overseas to India, which will reduce production costs. If Camlin Fine Sciences (CFS) successfully implements anisole technology, Camlin Fine Sciences (CFS) can expect similar margins to Clean Science Technology Ltd (CSTL). The risk-to-reward ratio for Clean Science Technology Ltd (CSTL) is extremely high, as are the valuations.
Read the report on clean sciences.
Watch the following video to more about both the companies in detail.