CSTL is among the few companies globally focused entirely on developing newer technologies using in-house catalytic processes, which are eco-friendly and cost competitive. This has enabled it to emerge as the largest manufacturer globally of certain specialty chemicals (MEHQ, BHA, Anisole and 4-MAP) in terms of installed manufacturing capacities as of March 31, 2021. Some of these technologies have been developed and commercialized for the first time globally.  

CSTL was incorporated on November 7, 2003, as 'Sri Distikemi Private Limited'. The company's name was changed to 'Clean Science and Technology Private Limited' in 2006, to reflect its vision of focusing on sustainable chemistry led by innovative technology and lower effluents. The company continues design and implement 'clean' chemistries based on catalytic technology developed in-house. As a result, most of its current production processes are either zero liquid discharge or release only water as discharge.  

Promoters of the company are Ashok Ramnarayan Boob, Krishnakumar Ramnarayan Boob, Siddhartha Ashok Sikchi and Parth Ashok Maheshwari. Ashok Ramnarayan Boob and Siddhartha Ashok Sikchi are both alumni of the Institute of Chemical Technology while Krishnakumar Ramnarayan Boob, and Parth Ashok Maheshwari, are all career-technocrats with a combined experience of over 60 years in the chemicals industry.

 CSTL products are used as key starting level materials, as inhibitors, or as additives, by customers, for products sold in regulated markets. Key customers include Bayer AG, SRF Limited, Gennex Laboratories Limited, Nutriad International NV and Vinati Organics Limited. Some of its customers have also been associated with them for over 10 years as of May 31, 2021. 

The company has two manufacturing facilities in India with 11 production lines (including three lines for catalyst production and regeneration), which had a combined installed capacity of 29,900 MTPA (metric tonnes per annum) as of December 31, 2020, and capacity utilization rates of 71.94% for Fiscal 2021. As majority of our sales are through exports, both facilities are strategically located at Kurkumbh (Maharashtra), which is in proximity to the JNPT port. Each facility has an on-site R&D unit, quality control department, warehouse, and effluent treatment system that treats effluent, to make facilities zero liquid discharge facilities. The company has also recently set-up a unit at the third facility adjacent to its existing facilities at Kurkumbh (Maharashtra), and have recently been allotted land for the construction of a fourth facility at Kurkumbh (Maharashtra). The captive solar plants meet part of its power requirements at facilities, which improves cost efficiencies and results in better utilization of resources. 

The company is also in the process of expanding its R&D infrastructure by setting-up an additional R&D unit at upcoming manufacturing facility at Kurkumbh (Maharashtra), where it plans to install R&D equipment for synthesizing new products and certain catalysts under development. 

CSTL products are used as polymerization inhibitors, intermediates for agrochemicals and pharmaceuticals, antioxidants, UV blockers, and anti-retroviral reagents, which are functionally critical in a wide range of industries, including in the manufacture of paints and inks, agro-chemicals, pharmaceuticals, flavors and fragrance, food and animal nutrition (feed), and personal care (cosmetics) products. 

The company's specialty chemicals have a wide range of applications that cater to a diverse base of customers across industries. CSTL customers comprise manufacturers in India and other regulated international markets including China, Canada, Europe, the United States of America, Taiwan, Korea, and Japan. In fiscals 2018, 2019, 2020 and in the nine months ended December 31, 2019, and 2020, exports revenue \represented 67.60%, 72.29%, 68.76%, 71.18% and 65.36%, of revenue from operations, respectively, with a significant portion generated from China. 

The company's raw materials largely comprise commodity chemicals due to catalytic processes and backward integration. Key raw materials comprise of major bulk chemicals including phenol, hydrogen peroxide, acetic anhydride, acetone, and tertiary butanol, which are widely available, unlike conventionally used diphenols such as hydroquinone and catechol that are susceptible to increased price volatility due to controlled supply. The company engages with numerous suppliers for its raw materials that are available domestically and imported in large volumes in India, enabling it to have greater control over costs.

The Offer and the Objects 

The offer comprises an offer for sale by selling shareholders of up to 17184689 equity shares at the upper price band of Rs 900 and 17575250 equity shares at the lower price band of Rs 880 aggregating to Rs 1546.62 crore. The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders, in proportion to the offered shares sold by the respective selling shareholders as part of the offer. 

Promoter Ashok Ramnarayan Boob post-issue shareholding shall decrease to 12.8% from 15.36% pre issue shareholding at the upper price band of Rs 900, Krishnakumar Ramnarayan Boob shall decrease to 2.6% from 4.67%, Siddhartha Ashok Sikchi to 3% from 3.39% and Parth Ashok Maheshwari to 5.6% from 6.36%  

Other selling shareholding will decrease to 54.7% to 65.09%. Other selling shareholders are Asha Ashok Boob, AshokkumarRamkishanSikchi HUF, Krishnakumar Ramnarayan Boob HUF, Ashok Ramnarayan Boob HUF, Nidhi Mohunta, Nilima Krishnakumar Boob, Shradha Krishnakumar Boob, Prasad Krishnakumar Boob, Pooja Vivek Navandar, Asha Ashok Sikchi, Kunal, Ashok Sikchi, Ashok Sikchi, Nandita Sikchi and Ganapati Dadasaheb Yadav.

Strengths 

The user industry- global personal care, pharmaceutical, animal feed, and agrochemical markets are valued at US$ 255 billion, US$ 1.3 trillion, US$ 425 billion, and US$ 62.5 billion, in fiscal 2019, respectively, and are expected to grow at a CAGR of 6.00%, 4.5%, 3.7% and 6.6%, between fiscal 2019 and fiscal 2025, respectively 

The company is in the process of expanding the manufacturing capacities for few existing products. It also intends to add manufacturing capacities for certain new products that will form part of stabilizer/ additive product portfolio, that it is in the process of developing, for application in paints and coatings, pharmaceutical, flavors, and fragrance, and agriculture industries. 

The global chemicals market is expected to grow at a CAGR of 6.2% to US$ 6,785 billion from 2019 to 2025. The overall market for specialty chemicals was valued at US$800 billion in 2019 and is expected to record a growth rate of 5- 6% over the next five years.

 The tightening of environmental norms in China and the recent trade dispute between China and the United States has reduced Chinese exports and resulted in shifting the source of key raw materials from China to India. This tightening of the environmental norms resulted in increase in operating costs, closure and relocation of manufacturing facilities along with rising labour costs. While these may not be permanent trends, these will involve significant costs of production for Chinese companies, enabling India to significantly strengthen its position in the global supply chain and position itself as a viable alternative for global players seeking a de-risked supply chain while retaining sourcing costs. Pharmaceuticals and agrochemicals sectors are expected to benefit as Chinese manufacturers continue to operate at lower capacity levels. 

The specialty chemicals industry presents significant entry barriers, including customer validation and approvals, expectation from customers for process innovation and cost reduction, high quality standards and stringent specifications

 Weaknesses 

In fiscals 2018, 2019, 2020 and in the nine months ended December 31, 2019, and 2020, revenue generated from top 10 customers represented 54.59%, 50.53%, 44.77%, 46.13%, and 47.97%, of total revenue from operations, respectively. 

A significant proportion of revenues are derived from sale of MEHQ and any reduction in the demand for MEHQ could have an adverse effect on the business, results of operations and financial condition. In fiscals 2018, 2019 and 2020, and in the nine months ended December 31, 2019, and 2020, revenue from sale of MEHQ represented 46.79%, 49.84%, 44.43%, 45.06% and 47.87% of total revenue from operations, respectively.

 The company derives a significant portion of its revenues from operations from a limited number of markets and any adverse developments in these markets could adversely affect business. Revenue from sale of products to China, India, Europe, and the Americas, represented 35.53%, 29.57%, 19.04% and 9.06%, respectively, in fiscal 2020, and 32.82%, 33.93%, 15.23% and 11.68%, respectively, in the nine months ended December 31, 2020. 

The company is subject to strict quality requirements, regular inspections, and audits by entities such as the USFDA and Bureau Veritas, and the success and wide acceptability of their products is largely dependent upon their quality controls and standards. Any failure to comply with quality standards may adversely affect their business prospects and financial performance, including cancellation of existing and future orders which may expose them to warranty claims. 

Exchange rate fluctuations may adversely affect the company's results of operations as their sales from exports and a significant portion of their expenditures are denominated in foreign currencies. 

The company operates in a hazardous industry and is subject to certain business and operational risks consequent to its operations, such as, the manufacture, usage, and storage of various hazardous substances. 

The company is required to obtain, renew, or maintain statutory and regulatory permits, licenses, and approvals to operate its business and manufacturing facilities, and any delay or inability in obtaining, renewing or maintaining such permits, licenses and approvals could result in an adverse effect on results of operations.

 Valuation 

For FY 2021, consolidated sales were up by 22% to Rs 512.43 crore. OPM rose 630 bps to 50.5% which led to 40% increase in operating profit to Rs 258.95 crore. Other income increased 136% to 25.64 crore while interest cost fell 25% to Rs 9 lakh and depreciation increased 25% to Rs 17.21 crore. PBT increased 47% to Rs 267.3 crore. Tax expenses rose 61% to Rs 68.92 crore. Net profit increased 42% to Rs 198.38 crore. 

At the higher price band of Rs 900, the offer is made at around 48.2 times its EPS of Rs 18.7 for the period ended March 31, 2021, on a post-issue equity share capital of Rs 10.62 crore of face value of Rs 1 each. Listed industry peers of the company are Vinati Organics, Fine Organics Industries, Atul, Camlin Fine Sciences, SRF, NavinFlourine International and PI Industries. 

In comparison Vinati Organics trades at 77.4 times its FY2021 EPS of Rs 26.2 at the current market price of Rs 2028, Fine Organics Industries trades at 75 times its FY2021 EPS of Rs 39.2 at the current market price of Rs 2944, Atul trades at 42.2 times its FY2021 EPS of Rs 221.6 at the current market price of Rs 9350, Camlin Fine Sciences trades at 48.6 times its FY2021 EPS of Rs 4 at the current market price of Rs 194, SRF trades at 37 times its FY2021 EPS of Rs 202.2 at the current market price of Rs 7487, NavinFlourine International trades at 76.1 times its FY2021 EPS of Rs 49.9 at the current market price of Rs 3799 and PI Industries trades at 62.2 times its FY2021 EPS of Rs 48.7 at the current market price of Rs 3025 

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