Clean Science and Technology - Target of Rs 1700

Clean Science and Technology

(CSTL) recently concluded its IPO via an offer for sale of INR15.5b, priced at INR900/share. Post the IPO the promoter shareholding stands at 78.5%. 

CSTL has emerged as the global leader in most of its product categories on the back of niche product offerings catering to polymer inhibitors/superabsorbents, anti-oxidants for the Food/Feed industry, pharma, home, and personal care. It has further bolstered its value chain through the novel manufacturing technology based on green chemistry for one of the key raw materials

CSTL’s streak is driven by its strong R&D capabilities – in both plant technological /engineering development as well as process innovation (based on greener chemistries). This has led to the gross margin expanding to 76% in FY21 from 62% in FY16 (the EBITDA margin expanded from 33% to 50.5% over FY16–21). 

The company has posted a robust revenue CAGR of ~29% in the last five years. We expect CSTL’s revenues to grow at a CAGR of ~23% over FY21–24 (on the back of capacity additions at Unit-III in phases over FY22). The company plans to capture a higher market share for its products. 

Its EBITDA margin is likely to remain robust at ~49%, with the gross margin at ~70% over FY21–24 – as the company continues to improve the yield of its products and processes. In view of its dominating product market share and ability to sustain the highest margins in the industry, we value the company at 50x FY24E EPS (as the company commands ROIC of ~75%) to arrive at Target Price of INR1,700/share.

The largest manufacturer of multiple specialty chemicals

CSTL is the largest producer of Monomethyl ether of hydroquinone (MEHQ), Butylated Hydroxy Anisole (BHA), and 4-Methoxy Acetophenone (4-MAP) globally. Furthermore, it has backward integrated into producing Anisole, a key raw material, and has even become the largest producer of Anisole globally. 

CSTL is also one of the top three global producers of the remaining three products. 

MEHQ is CSTL’s largest selling product (48% of total revenue); the the company holds a 52% global market share, which it expects to increase further to ~65% over the next 2–3 years. 

Most players in the Indian Specialty Chemicals industry view China as a competitor. However, CSTL rather sees the Chinese market as an opportunity as it supplies its products to this country – which contributed ~37% to its revenues in FY21 and is the biggest market for the company.

R&D – a key differentiator

Focus on process innovation to aid margins

Expansion of capacities for existing products to drive growth

Valuation and view – initiate with Buy (Credit -Motilal Oswal)

CSTL is an integrated player for its key products and is likely to grow at a faster rate than the industry due to its cost advantage as well as the introduction of new products. On this consideration, we forecast a revenue/EBITDA/PAT CAGR of 23%/22%/22% over FY21–24. 

CSTL is likely to generate FCF of INR6.4b over FY22–24E, with capex of INR3b planned over this period (INR1.5b each for units III and IV) – thus funding its capex purely via internal accruals and remain net cash going forward as well. 

CSTL has guided for a dividend payout policy of ~15% in view of its better cash generation. It also completed buyback of equity share worth INR491m in FY20. 

The key risks to our recommendations are (a) the lack of innovation in future – which has helped CSTL differentiate itself from others until now, (b) rising prices of key raw materials such as Phenol, which could suppress its gross margins, (c) any adverse ruling on the usage of any of its key products, which could affect global demand and, in turn, sales. 

We value the company at 50x FY24 EPS (as it commands ROIC of ~75%) to arrive at Target Price of INR1,700/share and recommend a Buy rating on the stock.

Credit: Motilal Oswal.

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