CSTL expansions, innovation could interest investors

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Investors who bought shares of Clean Science and Technology Ltd (CSTL), the maker of specialty chemicals, during its initial public offering (IPO) are very happy. After being listed at a 98% premium in July, stocks have climbed another 30% since then.

To be sure, the general dynamism of the stock markets has also rubbed off on the company’s shares. But, a decent performance in the June quarter, expansion plans and further forays also helped.

Analysts expected a 10.5% CAGR (compound annual growth rate) in global demand for green chemicals in the year 19-25, due to growing awareness of the adverse effects of certain chemicals.

CSTL’s key activity is green chemistry. In addition, the company also uses non-toxic raw materials with less effluent, which saves money.

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Solid outlook

Unlike competitors who are either dependent on China for raw materials or face competition from Chinese companies, CSTL is a seller of products to China. China contributes more than a third of the company’s revenue.

Meanwhile, the company has made a foray into the hindered amine light stabilizer (HALS) product line. These are used in various industries such as water treatment, paints and coatings. The estimated global market size for the HALS series is $ 1 billion per year.

As India’s leading manufacturer of HALS products, CSTL is expected to receive more dividends than other companies that may enter the space in the future.

The first dedicated production line for the HALS series will be at Unit 3 in Maharashtra and the company is investing in existing and new products. Additional production lines will also be installed at Unit 4.

The HALS business has the potential to add 30-40% to CSTL’s expected earnings by FY25, according to analysts at Axis Capital Ltd.

Thus, the company’s capacities doubled between FY17 and FY21 to reach 30,000 tonnes. With the first phase of Unit 3 due to start in the December quarter and the second phase of Unit 3 to be commissioned by FY 23, capacity is expected to reach 50,000 tonnes by then. Unit 4 expansions will add more later.

As a result, CSTL’s revenues could grow at a 23% CAGR in FY21-24 thanks to the incremental capacity additions to Unit 3, analysts from Motilal Oswal Financial Services Ltd. point out.

The EBITDA margin (earnings before income, taxes, depreciation and amortization) is also expected to remain robust at 49%.

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