Clean Science IC

Company Report
Clean Science & Technology (CLEAN) REDUCE

Specialty Chemicals September 25, 2021
INITIATING COVERAGE
Sector view: Attractive
Differentiated disrupter. We initiate coverage on Clean Science (CST) with CMP (`): 2,050
conviction in its ability to continue developing disruptive chemical processes across
products. In a favorable macro environment as seen currently, opportunities for CST Fair Value (`): 1,950
will only accelerate and will be adequately tapped by the capable technocrat BSE-30: 60,048
promoters. Our Fair Value of Rs1,950, implies 58X Sept 2023E EPS; significant
valuation premium over peer reflects superior RoCE and strong technology barriers.
However, valuations run up leaves no upside to CMP. Initiate with a REDUCE rating.
Valuations limit upside but a great business to own from a long-term standpoint
We initiate coverage on CST with a REDUCE rating and DCF-based FV of Rs1,950. Rich
valuations of 58X Sept 2023E EPS limit material upside in an otherwise stellar chemicals
franchise in the making. CST outshines peers on high RoIC of ~58% along with high EPS
growth (27% CAGR over FY2021-24E), driving healthy FCF generation. Our DCF (11.5%
WACC, 5% terminal growth) builds in 17%/17% EBIT/FCF CAGR over FY2022-47E.
Synergistic M&As, consolidation of BHA market, DCC import duty could drive upside.
Differentiated business backed by technocrat promoters

CST develops unconventional chemical processes aided by differentiated catalysts, which
provide it with (1) cost advantages, (2) better product yields, (3) reduced effluent and end-
products toxicity, (4) lower effluent discharge and (5) ability to start from cheaper and easily
available raw materials. This mix of cleaner, greener and competitively priced products is
appealing to both domestic and international customers, providing it with scale advantages,
eventually driving dominant market shares.
Flurry of new product launches in existing and new range

CST is expanding its product basket from phenol-based derivatives (MEHQ/BHA/Guaiacol/Anisole)
to acetone-based derivatives (HALS). CST is taking 50% capacity expansion in existing
products while exploring newer products in the same chain. Diversified presence across
agro/pharma/FMCG/monomers and shelf life solutions will likely continue to provide new
opportunities to grow amid the existing client base. FY2022 earnings are likely to be impacted
by a RM price run-up and logistical challenges but would improve as the situation normalizes.
Premium valuations a function of superior FCF generation and faster growth

Technocrat promoters with a go-getter attitude, a diversified revenue base from
customer/geography/product perspective, superior financials (earnings growth, RoCEs) and Ritesh Gupta
visible growth runway through new product launches drive our target valuations of 58X Sep ritesh.gupta2@kotak.com
2023E EPS, a premium of ~50% over best-in-class peers. Promoters’ incentives are capped at
4% of PBT now versus 10% pre-IPO. High EBITDA margin of ~50% is not a risk given process- Prasenjit Bhuiya
related entry barriers but ‘key man’ dependence on the promoter is. prasenjit.bhuiya@kotak.com
Company data and valuation summary

Stock data Forecasts/valuations 2021 2022E 2023E
CMP(Rs)/FV(Rs)/Rating 2,050/1,950/REDUCE EPS (Rs) 18.7 21.6 29.4
52-week range (Rs) (high-low) 2,219-1,422 EPS growth (%) (98.2) 15.8 36.0
Mcap (bn) (Rs/US$) 218/3 P/E (X) 109.8 94.8 69.7
ADTV-3M (mn) (Rs/US$) 0/0 P/B (X) 40.3 29.2 21.2
Shareholding pattern (%) EV/EBITDA (X) 84.0 70.9 52.0
Promoters 78.5 RoE (%) 45.0 35.7 35.2
FPIs/MFs/BFIs 3.9/2.4/1.3 Div. yield (%) 0.0 0.1 0.1
Price performance (%) 1M 3M 12M Sales (Rs bn) 5 6 8 Kotak Institutional Equities
Absolute 40.1 0.0 0.0 EBITDA (Rs bn) 3 3 4 Research
Rel. to BSE-30 32.8 0.0 0.0 Net profits (Rs bn) 2 2 3
Important disclosures appear
at the back
Source: Company data, Kotak Institutional Equities estimates
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Specialty Chemicals Clean Science & Technology
TABLE OF CONTENTS
Financial snapshot ........................................................................................... 3
Valuation, like Beauty, is in the eye of the beholder......................................... 4
Process-led differentiation drives global market leadership .............................. 7
CST has multiple traits of a scalable business ................................................. 10
Good opportunities in existing market; HALS the next big revenue driver ...... 16
Growth momentum to continue .................................................................... 19
Key risks ........................................................................................................ 25
Company profile: Largest producer for four of its seven products .................. 27
The prices in this report are based on the market close of September 24, 2021.
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Clean Science & Technology Specialty Chemicals
FINANCIAL SNAPSHOT
Exhibit 1: Key financials of CST, March fiscal year-ends, 2019-24E
Revenue EBITDA PAT EPS P/E EV/EBITDA RoE RoCE

(Rs mn) (Rs mn) (Rs mn) (Rs) (X) (X) (%) (%)
2019 3,933 1,365 978 9.2 222.6 159.5 40.2 38.8
2020 4,193 1,854 1,397 13.2 155.8 117.4 43.4 42.5
2021 5,124 2,590 1,984 18.7 109.7 84.0 43.5 40.6
2022E 6,296 3,052 2,297 21.6 94.8 70.9 34.8 33.1
2023E 8,332 4,152 3,124 29.4 69.7 52.0 34.5 33.1
2024E 10,603 5,359 4,017 37.8 54.2 40.0 32.8 31.5
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Summary financials of CST, March fiscal year-ends, 2018-24E (Rs mn, unless specified)
2018 2019 2020 2021 2022E 2023E 2024E

Profit model
Revenue 2,411 3,933 4,193 5,124 6,296 8,332 10,603
EBITDA 730 1,365 1,854 2,590 3,052 4,152 5,359
Other income 46 113 109 256 225 250 275
Interest (1) (0) (1) (1) (2) (2) (2)
Depreciation (76) (110) (137) (172) (187) (234) (276)
Profit before tax 700 1,367 1,824 2,673 3,089 4,166 5,356
Tax expense (212) (389) (427) (689) (792) (1,041) (1,339)
PAT 487 978 1,397 1,984 2,297 3,124 4,017
EPS (Rs) 4.6 9.2 13.2 18.7 21.6 29.4 37.8
Balance sheet
Equity 1,879 2,721 3,421 5,397 7,464 10,276 13,891
Total borrowings 1 26 27 3 3 3 3
Long-term liabilities 102 139 102 176 176 176 176
Current liabilities and provisions 380 389 749 1,024 1,257 1,664 2,118
Total liabilites 2,361 3,275 4,299 6,599 8,900 12,119 16,188
Net fixed assets 1,038 1,309 1,690 2,408 3,022 4,187 4,911
Investments 178 752 1,330 2,321 2,321 3,321 4,321
Cash and equivalents 295 94 93 93 1,375 1,722 3,280
Other current assets 849 1,119 1,186 1,776 2,182 2,888 3,675
Total assets 2,361 3,275 4,299 6,599 8,900 12,119 16,188
Free cash flow
Operating cash flow excld. working capital 535 1,056 1,469 2,078 2,259 3,109 4,018
Working capital changes (87) (209) 131 (150) (172) (299) (334)
Net finance costs (3) (7) (55) (29) (225) (250) (275)
Cash flow from operations 452 854 1,655 1,958 2,312 3,059 3,960
Capital expenditure (320) (391) (504) (840) (800) (1,400) (1,000)
Free cash flow 132 464 1,151 1,118 1,512 1,659 2,960
Ratios
EBITDA margin (%) 30.3 34.7 44.2 50.5 48.5 49.8 50.5
Net debt/equity (X) (0.2) (0.0) (0.0) (0.0) (0.2) (0.2) (0.2)
Book value (Rs/share) 17.7 25.6 32.2 50.8 70.3 96.7 130.8
RoAE (%) 27.6 40.2 43.4 43.5 34.8 34.5 32.8
RoACE (%) 27.4 38.8 42.5 40.6 33.1 33.1 31.5
RoIC (%) 32.8 48.2 66.0 73.7 66.2 62.7 66.4
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

VALUATION, LIKE BEAUTY, IS IN THE EYE OF THE BEHOLDER

CST’s rich valuation is a function of (1) best-in-class RoCE driving healthy FCF despite growing at a faster pace
than peers, (2) process technology-led entry barriers driving global dominance in existing products, (3) growth
visibility led by existing and new products like HALS, (4) high-quality technocrat promoters with no
succession planning risks and (5) better ESG practices – green processes, high-quality board, clean financials.
However, we don’t see any meaningful upside to CMP despite assigning best-in-class valuation of 58X Sept
2023 EPS (50% premium to peers) to arrive at an FV of Rs1,950. Initiate with a REDUCE rating. Synergistic
M&As, anti-dumping duty on DCC and consolidation in MEHQ/BHA can drive upside to our estimates.
Rich valuations a function of the differentiated DNA

A mix of macro opportunities, technocrat promoters, proven track record on developing
differentiated chemical processes, efficient capital allocation and quality board/governance
drive our conviction on the longevity of earnings and sustenance of premium valuations for
CST.
 Supportive macros. Macros are extremely supportive for Indian companies – (1) globally
companies are looking to add more India-based suppliers, (2) Indian consumers are
looking to substitute imports with quality Indian suppliers and (3) India’s cost
competitiveness is improving with cost structures in China as well as other developed
countries going up while the Indian government is improving incentive structures for
indigenous manufacturers. We believe that while the opportunity is large, only a few
quality promoters in India will be able to take maximum advantage of the same.
 Technocrat promoters. We see a winning team within promoters with Ashok Boob and
Krishna Boob handling the operations, finance, government/local liaison and other
compliances even as Siddharth Sikchi drives R&D and business development. All three of
them are technocrats with many years of experience. Siddharth presents a unique
combination of being a technocrat as well as a person with solid business acumen and
client relationship building skills driving CST’s superior capabilities in both. Parth
Maheshwari (son of Ashok Boob) along with Siddharth Sikchi adds comfort on succession
planning of the business. The management recognizes the growth ask and has been
stepping up new product launches amid supportive macros.
 Differentiated processes drive ability to protect margins. CST differentiates versus

peers with its unique ability to make a process-differentiated citadel, which extends into
backward as well as forward integration. Such process-led differentiation also drives
ability to gain a disproportionate market share eventually. CST has already proven these
capabilities in the phenol block where they have already built global dominance in MEHQ.
4-MAP, Anisole and BHA. Incremental expansions into acetone blocks such as HALS
would drive further visibility in earnings growth.
 Quality board and corporate governance. We like the fact that CST has invested in a
high-quality board of directors for the past many years comprising (1) Pradeep Rathi, the
promoter of Sudarshan Chemicals, (2) Prof GD Yadav – well-regarded professor of UDCT
(now ICT Mumbai) and (3) Sanjay Kothari – a veteran financial investor. BSR and Co
(KPMG affiliated) have been the auditors of the company for the past many years.
Promoter directors have also capped their combined performance incentives at 4% of PBT
versus 10% of PBT pre-IPO.

 Similarity with Vinati Organics and ATBS. CST is similar to Vinati in terms of its DNA to
focus on inventing disruptive chemical processes and then build global leadership backed
by cost leadership and greener footprint of the process. This is further backed by
backward and forward integration to expand the target market as well as cost leadership.
We note that Lubrizol exited the ATBS market, leading to a sharp improvement in market
share and realizations for Vinati from FY2019. We believe there can be a possibility of
CST benefitting from similar consolidation where competitors leave MEHQ/BHA
eventually. CST has the advantage of lower cost structures versus peers, similar to ATBS
which can drive exit of competition from the market.
Our DCF valuation factors long-term growth opportunity

We believe ~25% revenue CAGR over the next 15 years is higher than that of other
chemical peers covered by us, largely due to the softer base for CST. We also moderate our
EBIT margins to 31% from 45% over these years as with such high revenue growth,
opportunities to get consistently higher margin products would be a challenge. We note
these EBIT margins are still 600-1,000 bps higher than peers for which we model long-term
margins of ~20-25%. We believe chemical margins are always a function of differentiated
chemical processes and the extent of backward integration; to that extent, we are
comfortable with the higher delta on the margins.
Our DCF model builds in revenue growth CAGR of 27% over FY2021-24E, 22% revenue
CAGR over FY2024-37E and 12% CAGR over FY2037-47E. We estimate EBITDA margins to
taper down as CST enters into new opportunities. We estimate EBITDA growth CAGR of 25%
over FY2021-24E, 18% CAGR over FY2024-37E and 12% CAGR over FY2037-47E. We take
WACC of 11.5% for CST and terminal growth of 5%. We model FCF growth CAGR of 12%
over FY2021-24E, 19% over FY2024-37E and 12% CAGR over FY2037-47E.
Exhibit 3: Our DCF-based Fair Value of Rs1,950 implies 5% downside from CMP
2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2037E 2047E
Revenue 6,296 8,332 10,603 13,448 16,810 21,013 26,266 32,570 39,410 135,274 434,761
EBIT 2,866 3,918 4,774 6,055 7,568 9,460 11,826 14,664 17,743 41,964 134,871
EBIT*(1-t) 2,131 2,938 3,580 4,541 5,676 7,039 8,798 10,910 13,201 31,221 100,344
Depreciation 18 7 234 276 322 465 573 692 8 32 995 2,967 13,129
Capex (8 00) (1,400) (1,000) (1,200) (1,600) (2,000) (2,200) (2,600) (3,000) (7,296) (35,347)
Changes in working capital (151) (263) (312) (412) (48 7) (609) (761) (913) (991) (2,703) (5,726)
Free cash flow 1,367 1,510 2,544 3,251 4,054 5,003 6,529 8,229 10,204 24,189 72,399
PV of FCF 1,367 1,427 2,157 2,472 2,765 3,060 3,581 4,048 4,502 4,981 5,020
Year of discounting — 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 14.5 24.5
DCF summary
Discount rate (%) 11.5
Terminal growth rate (%) 5
NPV of FCF (FY2023-47E 112,815
Terminal value 1,323,216
PV of terminal value 91,751
Enterprise value 204,565
FY2023E net cash 1,719
Equity value 206,285
Number of shares 106
NPV /share (Rs) 1,950
Assumptions
Revenue growth (%) 23 32 27 27 25 25 25 24 21 16 10
EBIT margin (%) 45.5 47.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0 31 31
Gross block turn (X) 2.1 2.0 2.0 2.1 2.2 2.2 2.2 2.3 2.3 3 2
Net working capital days 53 53 53 53 53 53 53 53 53 53 53
Source: Kotak Institutional Equities estimates

Relative valuations: premium is a function of higher RoCEs

CST’s rich valuations are a function of (1) best-in-class RoCEs, which drive better FCF despite
growing at a faster pace than peers, (2) process technology-led differentiated entry barriers
and proven track-record of building global dominance in existing products, (3) growth
visibility with opportunities to grow in existing products as well as new product groups such
as HALS, (4) high-quality technocrat promoters with no succession planning risks and (5)
better ESG practices – cleaner processes, a high-quality board, and clean accounting
practices.
Exhibit 4: CST is one of the fastest-growing companies in the sector along with best RoIC resulting in premium valuations versus peers
Comparison of CST with sector peers
CAGR 2017-21 (%) Cumulative 2018-21 (Rs bn) 2021 CAGR 2021-24 (%) P/E (X)
Revenue EBITDA CFO Capex FCF RoIC (%) RoCE (%) Revenue EBITDA 2023E 2024E
Aarti 12.3 10.7 28.2 38.8 (10.5) 19.9 11.2 25.0 25.9 33.7 28.9
Atul 7.1 15.8 24.1 10.5 13.6 31.3 16.2 17.2 13.6 33.2 28.0
Clean Science 28.1 37.5 4.8 2.1 2.8 73.7 40.6 27.4 27.4 69.7 54.2
NFIL 11.8 22.4 5.1 3.9 1.2 21.2 12.5 27.1 32.0 69.8 49.4
PI 26.2 22.3 23.6 20.8 2.8 20.5 15.1 28.0 33.8 39.8 30.1
SRF 14.9 21.1 40.5 49.1 (8.7) 16.8 13.9 25.1 21.6 33.6 28.4
Vinati 10.5 12.9 9.7 4.8 5.0 19.1 26.2 37.0 35.4 37.9 29.9

PROCESS-LED DIFFERENTIATION DRIVES GLOBAL MARKET LEADERSHIP

CST has built global leadership in niche chemical molecules through differentiated chemical processes. It has
developed various catalysts in-house through R&D, which are used across process developments, and have
helped improve productivity, yields, selectivity, effluent toxicity and cost efficiencies of existing molecules.
This drives their sector-leading margins and the ability to gain disruptive market share in the product
segments they operate in.
CST differentiates its Strong product development capabilities demonstrated in MEHQ and BHA
processes from CST develops unconventional chemical processes aided by catalysts, which provide it (1) cost
conventional processes by advantages, (2) better product yields, (3) reduced toxicity in effluents and end products, (4)
employing clean lower effluent discharge and (5) ability to start from cheaper and domestically available raw
technologies and has materials. This mix of cleaner, greener and cheaper products is appealing to both domestic
and international customers, providing it with scale advantages eventually. Full backward
optimized the use of non-
integration into basic chemicals (such as phenols) also drives a much more reliable supply
toxic raw materials, chain compared to peers leading to greater trust with clients.
resulting in lower effluent
Further, based on the technical expertise, CST has created global scale capacities, which are
generation, and better
difficult to replicate, and has created significant barriers for new entrants. CST’s position as
quality products (such as
the most cost-competitive producer of these critical products is evident by its significant
sulphur-free BHA) versus exports to China (~35% of sales). Most of the catalysts used by CST are non-metallic in
conventionally produced nature leading to no metal sludge in the effluent.
chemicals.
CST has broadly structured its R&D activities into three verticals: (1) for existing products and
catalyst systems, to improve yields and selectivity in their existing product portfolio, (2) for
expanding their product portfolio in the stabilizer and additives business and (3) for
identifying products with high demand that only limited manufacturers produce within India
and globally. In particular, they focus on specialty chemicals, which find applications in
critical industries such as pharmaceuticals and agriculture. We believe such differentiated
focus is likely to keep new product introductions flowing while existing products continue to
witness margin improvement.
Anisole is an interesting key case study on CST’s ability to build entry barriers
CST uses Anisole as a starting material for most of its key products such as MEHQ, BHA, 4-
MAP and Guaiacol. Not only is CST’s process of making these products from Anisole unique
but the entire process of making Anisole is in itself distinctive.
Over the years, (1) it backward integrated into manufacturing of Anisole in 2017 and then (2)
it changed its process of manufacturing Anisole from liquid-phase to vapour-phase, which
improved its cost by ~20%. Its R&D-driven process innovation has created an advantage in a
highly competitive industry and helped the company achieve industry-leading margins for
FY2021.
CST is the only company globally to deploy vapour-phase technology for manufacturing
Anisole from phenol, driving better atom economy and only water as effluent compared to
liquid phase manufacturing processes that would have sulphates as a by-product.

Exhibit 5: CST develops catalysts in house, which makes difficult reactions feasible with low effluents and high-quality products
CST’s manufacturing route starting from key raw materials to final product
Vapour phase reaction

Phenol Anisole Water
Catalyst +
MEHQ Water
Catalyst +
Anisole
Guaiacol Water
Catalyst +
MEHQ Sulphur-free BHA Water
Catalyst +
Anisole 4-MAP
CHA DCU DCC
Key raw material End product Effluent
Source: Kotak Institutional Equities
Conversion of Anisole to MEHQ and Guaiacol is also a unique process
CST uses unique catalyst driven processes to convert Anisole to (1) MEHQ and Guaiacol, (2)
convert MEHQ to BHA. The BHA manufacturing process is unique in the sense that it
produces sulphur free BHA resulting in CST’s products being preferred over those of peers in
segments like food and pharma. Similarly the Guaiacol produced by CST finds applications in
pharma which also drives better margins for the company. Most of the competition is able
to sell Guaiacol only to Vanillin producers in China which is not a meaningful margin driver.
Full backward integration and largely India-based supply chain
Due to its catalytic processes and backward integration, CST’s raw materials largely comprise
commodity chemicals. Key raw materials comprise major bulk chemicals including phenol,
hydrogen peroxide, acetic anhydride, and tertiary butanol, which are widely available, unlike
conventionally used diphenols (used by CST’s competition) such as hydroquinone and
catechol that are susceptible to increased price volatility due to controlled supply. CST
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.

Global leadership in existing products
CST’s unique backward and forward integration as well as process advantages drive its
ability to gain rapid market share in whichever categories it enters into. This cost leadership
backed by good business development capabilities builds further entry barriers of scale
advantages. CST is the world’s largest producer in terms of capacities for MEHQ, BHA,
Anisole and 4-MAP. CST is the world’s second-largest producer for L-Ascorbyl Plamitate and
the third-largest producer of Guaiacol.
Exhibit 6: CST has global leadership in four products out of its seven existing products
CST’s key products, global market size, competitive positioning and application
Global market CST

Products size (MTPA) ranking Peers Application
Performance chemicals
(a) Polymerization inhibitor in acrylic acids, acrylic esters, super
Camlin Fine Sciences
MEHQ 12,500 Largest globally absorbent polymers (diapers and sanitary pads)
Solvay
(b) Precursor for agrochemical industry
Camlin Fine Sciences

BHA 9,000 Largest globally Anti-oxidant in food and feed industry
Solvay
Camlin Fine Sciences Used in infant food formulations, breakfast cereals and
AP 450 Second largest in India
Yasho Industries cosmetics
Pharmaceutical intermediates
Camlin Fine Sciences (a) Pre-cursor to manufacture APIs for cough syrup
Guaiacol 60,000 Third largest globally
Solvay (b) Pre-cursor to Vanilin
Hongrui Fine Chemicals

DCC 7,000 Largest in India Used as reagent in ARVs
Shandong Huihai Pharma
FMCG intermediates
4-MAP 7,200 Largest globally Cosmos Nanjing Used in UV blocker in sunscreen
Atul
(a) Captive consumption
Anisole 34,000 Largest globally Mithila Rasayan
(b) Precurosr to perfumes, insect phermones, pharmaceuticals
Solvay
Notes:
(a) CST doesn’t participate in Vanillin market for Guaiacol.
Source: Company, Kotak Institutional Equities
CST’s specialty chemicals have a wide range of applications and its key raw materials are
abundantly available resulting in a significantly de-risked business model.

CST HAS MULTIPLE TRAITS OF A SCALABLE BUSINESS

CST despite being a young company, demonstrates a lot of scalability potential. This scalability comes from (1)
technocrat promoters who bring in expertise across different business functions and mindset to build a
quality board quite early in their journey, (2) strong capital allocation track-record, (3) diversified revenue
base without any material concentration risks and (4) the ability to consistently drive improvements in
existing businesses with backward/forward integration and building global scale.
Experienced promoters with extensive domain knowledge

Four members of the promoter family take care of different functions, driving management
depth into a young organization. Both Ashok Boob and Siddharth Sikchi are graduates of
ICT Mumbai, which is one of the best chemical engineering institutes in India. Ashok Boob
and Krishna Boob successfully built Mangalam Drugs and Organics before making an exit.
Feedback from our industry checks is positive on promoters: (1) most of the
customers/distributors appreciate transparency and business dealings of CST, (2) MNC
competition appreciates the company’s intent to maintain pricing decorum without impacting
profit pools of the sector and (3) employee satisfaction levels continue to remain high.
Promoters bring in complementary skills and man different functions. Siddharth takes care
of business development as well as R&D. We believe Siddarth’s acumen in R&D along with
feedback mechanism from customers on new products drive CST’s success. Krishna Boob
takes care of regulatory compliances and government/regulatory liaison. Parth Maheshwari,
Boob family’s second generation has also been manning manufacturing operations.
Promoters have started hiring critical professional resources as and when required, including
a professional CFO and a seasoned R&D head. We believe the management is now building
the first layer of professionals and then subsequently new layers of professionals will be built.
Exhibit 7: Promoter family members employed in the business are well-qualified and man different critical functions for the organization
Ashok Boob Over 25 years of work experience in the

Managing Director chemical industry
B.Chem. Engg. - ICT, Mumbai, India
Key functions: Projects, Manufacturing, Previously worked as an Executive Director
Capabilities at Mangalam Drugs and Organics Ltd.
Siddharth Sikchi
M.Sc - University of Manitoba, Canada
Executive Director Over fourteen years of experience in the
chemical industry
B.Tech - ICT, Mumbai
Key functions: Marketing and R&D
Close to two decades of expertise in the

Krishna Boob
chemical industry
Executive Director
B.Pharma - University of Mumbai, India
Previously worked as an Director at
Key functions: Public relations, Purchase
Mangalam Drugs and Organics Ltd.
Parth Maheswari
Over 5 years of work experience in the MBA - Babson College
Vice President
chemical industry B.Chem. Engg - Savitribai Phule University,
Pune
Key functions: Business operations

CST has professional team heading key verticals like production, R&D, finance, compliance etc.
Exhibit 8: CST has hired at the senior levels to look at R&D and finance aspects of the business
Designation Joining Previous experience Qualifications

Bachelor of Science, University of
Krishna Kumar Saboo President Aug-14 Deepak Nitrite
Mumbai
Scientist, University of California, PhD (Tulane University), B.Tech and

Kothanda Rama Pichaandi VP (R&D) Jan-18
Research Scientist, Purdue University M.Tech (ICT)
Mirae Asset Capital markets,

Pratik Bora CFO Jan-20 MBA (NMIMS), B.Tech
Religare Group
Company
secretary and Law Graduate, University of Pune,
Mahesh Kulkarni Mar-21 Tech Mahindra
Compliance Fellow of ICSI
officer
A strong board right from the early days
CST has benefited from guidance of a high-quality board, which has a mix of technocrats,
proven entrepreneurs and investors. Professor G D Yadav, Non-Executive Independent
Director, is a senior professor at ICT Mumbai and has had many research breakthroughs over
the years. Pradeep Rathi, Non-Executive Chairman of the Board, brings in two decades of
experience in the industry and is also the promoter of Sudarshan Chemicals.
Exhibit 9: CST has a credible board right from its early days
CST’s board members, their educational qualifications and work experience
Name Position Remarks

Mr Rathi holds a bachelor’s degree in science from University of Poona and master’s degree of science in chemical
Pradeep Ramwilas Chairman and Non- engineering from Massachusetts Institute of Technology, USA. He also holds a masters degree in business
Rathi Executive Director administration from Columbia University, USA. He has close to 25 years of experience in the chemical industry and
is currently a director of Sudarshan Chemical Industries Limited, Pune, India.
Mr Boob holds a bachelor’s degree in chemical engineering from the Institute of Chemical Technology, Mumbai. He
Ashok Ramnarayan
Managing Director has close to 25 years of experience in the chemical industry and has previously worked as an executive director at
Boob
Mangalam Drugs and Organics Limited.
Mr Sikchi holds a master’s degree in science from the University of Manitoba, Canada and a bachelor’s degree in
Siddhartha Ashok
Wholetime Director technology from the Institute of Chemical Technology, Mumbai. He has over 15 years of experience in the chemical
Sikchi
industry.
Mr Boob holds a bachelor's degree in pharmacy from the University of Bombay, India. He has close to two decades
Krishnakumar
Wholetime Director of experience in the chemical industry and has previously worked as a director at Mangalam Drugs and Organics
Ramnarayan Boob
Limited
Mr Kothari holds a bachelor’s degree in commerce from University of Calcutta. He is a member of the ICAI and ICSI.
He has been awarded a certificate of merit from Institute of Cost and Works Accountants of India. He has
Sanjay Kothari Non-Executive Director previously been associated with Industrial Meters Limited, Ajanta Auto Industries Private Limited, Akar Tools
Limited and Hindustan Wires Limited. He is currently a director of Anantroop Financial Advisory Services Private
Limited amongst others
Mr Yadav holds a bachelor’s degree in chemical engineering from University of Bombay. He also holds a doctorate
Ganapati Dadasaheb Non-Executive, Independent in philosophy (technology) from University of Bombay, a doctorate of science (Honoris Causa) from D.Y. Patil
Yadav Director University, Kolhapur and a doctorate of engineering (Honoris Causa) from National Institute of Technology
Agartala.
Keval Navinchandra Non-Executive, Independent Mr Doshi holds a bachelor’s degree in commerce from University of Bombay. He is a member of the ICAI. He has
Doshi Director been associated with Ernst & Young LLP in the past.
Non-Executive, Independent Ms Dubhashi holds a post graduate diploma in business administration from the Indian Institute of Management,
Madhu Dubhashi
Director Ahmedabad. She has been associated with Global Data Services of India Limited in the past.

Steady track-record on financials and capital allocation

Three things we like about CST’s financials are (1) its consistent revenue growth led by
introduction of new products, (2) improvement in gross margins though backward
integration into Anisole (liquid phase process) and then change in Anisole manufacturing to
a vapor phase, which further improved yields, and (3) forward integration from MEHQ to
BHA, which is highly margin accretive.
Exhibit 10: CST allocated capital into backward integration, foray into forward integration products, developed more products from same
raw material apart from capacity expansion into existing projects consistently, improving its RoCE
Exhibit 11: CST has consistently maintained higher gross margin versus its peers
Gross margin (%) of CST and its peers, March fiscal year-ends, 2018-23E
2018 2019 2020 2021 2022E 2023E

80
70
60
50
40
30
20
10
0
Aarti Atul Clean Science PI NFIL Vinati
Source: Companies, Kotak Institutional Equities estimates

Exhibit 12: CST has consistently maintained higher EBITDA margin versus its peers
EBITDA margin (%) of CST and its peers, March fiscal year-ends, 2018-23E
2018 2019 2020 2021 2022E 2023E

60
50
40
30
20
10
0
Exhibit 13:
Exhibit 13: CST’s gross block is comparable to the best in the sector
Exhibit
Gross 13: turnover (X) of CST and its peers, March fiscal year-ends, 2018-23E
block
2018 2019 2020 2021 2022E 2023E

Exhibit
3.0 13:
Exhibit
2.5 13:
Exhibit 13:
2.0
Exhibit 13:
1.5
Exhibit 13:
1.0
Exhibit 13:
0.5 13:
Exhibit
Exhibit
- 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:
Exhibit 13:

Exhibit 14: CST has consistently maintained superior RoCE in the sector
RoCE (%) of CST and its peers, March fiscal year-ends, 2018-23E
2018 2019 2020 2021 2022E 2023E

45
40
35
30
25
20
15
10
0
Exhibit 15: CST’s superior RoCE leads to healthy FCF generation

CST’s cash flow from operations, capex and free cash flow (Rs bn), March fiscal year-ends, 2018-23E
3.0 CFO (Rs bn) Capex (Rs bn) FCF (Rs bn)
2.5
2.0
1.5
1.0
0.5
0.0
2018 2019 2020 2021 2022E 2023E
Materially lower concentration risks

CST’s business model has been built in such a way that it has low concentration risks in
terms of products, customers and geography. Promoters consciously put efforts to minimize
all kind of concentration risks. Top ten customers contribute less than 50% of CST’s
revenues. Its products and customer base allow for limited dependence on any particular
industry, relatively insulating CST from any industry-specific trends.

Exhibit 16: Exports to China indicate CST’s competitiveness Exhibit 17: Diversified product portfolio within sub-segments
CST’s revenue breakdown by geography, March fiscal year-ends CST’s revenue breakdown by products, March fiscal year-ends
(%) India China Europe Americas RoW Others FMCG chemicals

100 Pharmaceutical intermediates Performance chemicals
5 6
9 (%)
11 100 6 2
80 18 12
14 14
80 16
60 20
38 37 60
40
40
69
60
20
30 31 20
0 0
2018 2021 2018 2021
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

GOOD OPPORTUNITIES IN EXISTING MARKET; HALS THE NEXT BIG REVENUE DRIVER
CST’s new revenue drivers are already in place and include (1) capacity expansion for existing products by ~50%
specially on Anisole, MEHQ and BHA, (2) entry into HALS which should start contributing revenues from
FY2023E, (3) developments on new products in adjacencies complementing existing products. In addition,
management is looking at (1) new product launches for import substitution in agro and pharma
intermediates, (2) more products in HALS/other antioxidants, (3) adjacent intermediates in existing product
lines based out of phenols and acetone.
Product identification to ramp up
CST’s core value CST, through its R&D team, identifies target products. It does not target any particular
chemistry but focuses on the number of steps involved, quantity and toxicity of effluents
proposition hinges
generated and number of competitors. It generally restricts itself to 3-4 steps (reactions) and
around product
prefers products having high volume and low effluents. CST then tries to improve the
identification, processes which also result in acceleration in market share gain. CST uses multiple catalysts
developing unique for manufacturing products and actual details of these catalysts are known only to the
processes and then senior management. One of the key focuses of the R&D and engineering team is to develop
gradually gaining these catalysts and regenerate these catalysts.
market share in those R&D is only one aspect of the business; the commercialization and scale up of products to
products through better plant scale from lab scale holds the key requiring a long learning curve and differentiates the
quality products, stable company from any new entrants. CST has been consistently improving its processes, as it
pricing and healthy scaled up CST products, and these can be classified into three groups
client relationships.
 Core products. CST has a set of core products like BHA, MEHQ and Guaiacol which are
key growth and margin drivers. CST’s entire phenol chain revolves around maximizing the
output for these products.
 Satellite products. Customers prefer a basket of products and as such having a presence
in some of these products helps in gaining higher wallet share of customers. Products like
AP, Veratole and TBHQ are satellite products which alone may not drive significant sales
but will help in driving higher sales and improving margins of core products.
 New products. CST is entering new products like HALS which would be the next key
growth driver for the company. These products are entirely on a different raw material
chain i.e. acetone. This would help diversify the company’s product chain.
Existing products would continue to support growth

CST is expanding capacities for some of its existing products - MEHQ, BHA and Guaiacol by
~50%. This capacity expansion is expected to be completed by FY2022 end. We expect this
capacity to get fully utilized over the next three years.
Exhibit 18: CST is taking capacity expansion in existing products and expected to be completed by FY2022 end
CST’s capacity expansion plan across existing segments
Capacity (MTPA) Completion

Existing Post expansion Timeline Remarks
Performance chemicals 9,640 14,000-15,000 FY2022 end MEHQ and BHA capacity expansion by 50%
Pharma intermediates 4,060 5400-5700 FY2022 end Guiacol capacity expansion by 50%
FMCG chemicals 16,200 25,000-26,000 FY2022 end Anisole capacity expansion by 50%
Total 29,900 44,000-45,000 Commissioned in 1QFY22 Overall capacity increases by 50%

 MEHQ. This product is finding incremental usage in agrochemicals which has accelerated
market growth. CST has been supplying MEHQ to agrochemical players such as PI and
SRF who in turn are gaining market share in agrochemical contract manufacturing from
European players. Management expects current 50% market share to increase to 65%
over the next three years. The ongoing project for doubling of capacity for MEHQ would
cater to (1) internal consumption of BHA, (2) growing agrochemical sales and higher
exports share. On an overall basis we expect ~13% volume CAGR for MEHQ over the
next three years.
 BHA. CST is expanding capacity here too by 50%. CST has about 16-17% market share
currently and it intends to go to ~50% market share over the next few years. We also see
the possibility of further consolidation in these products, similar to what we saw in ATBS
for Vinati Organics
 Guaiacol. Guaiacol is a co-product while making MEHQ from Anisole. CST sells the
product to the pharma segment which is an ~8,000 TPA market. We believe CST
accounts for 25% of the market. CST is expanding into downstream products such as
Veratrole which finds applications in agro, pharma APIs/intermediates and electronic
chemicals.
Strong product pipeline for future growth

HALS - a big opportunity
HALS is likely to be the next big growth driver for CST. It offers (1) a large target market of
~US$1bn growing at ~7% pa, (2) a differentiated chemical process which is also fully
backward integrated upto base chemicals like acetone and (3) healthy gross margins of ~60%
(KIE estimate) which will scale up as further yield improvements are done. CST is likely to
generate Rs6 bn revenue from HALS by FY2025E as a large import substitution market is
already in place with no Indian manufacturers.
 Market size. HALS (Hindered Amine Light Stabilizers) are used in the prevention of
photo-oxidation of underlying polymers. They are used in plastics, auto, paints, and
coatings to increases the life of the product. There are multiple kind of HALS used with
different substrates. HALS globally is a US$1bn market growing at 7% CAGR in
US$ terms. BASF, Adeka, Sabo and SI group are the key players here.
 Product differentiation. CST will manufacture HALS using a catalytic process as well.
Realizations for various types of HALS vary from US$6-12/kg. The products that CST is
targeting currently are witnessing imports of ~200 tons/month.
 Multiple HALS in the pipeline. Over the next few years, CST is expected to launch
multiple new HALS products backed by differentiated chemical processes and full
backward integration into key intermediates.
 Multiple applications. HALS have different applications in polymers, paints etc. HALS
701 will go to blenders who ultimately give to polymer producers. HALS 701 is purchased
by similar customers as MEHQ. Hence there is likely to be some cross-selling synergy
effect from HALS launch.
HALS (Hindered Amine Light Stabilizer)
What are HALS? Hindered Amine Light Stabilizers (HALS) are chemical compounds
containing an amine functional group that are used as stabilizers in plastics and polymers.
These compounds are typically derivatives of tetramethylpiperidine and are primarily used to
protect the polymers from the effects of photo-oxidation; as opposed to other forms of
polymer degradation such as ozonolysis.

How do they prevent photo oxidation? HALS do not absorb UV radiation, but inhibit
degradation of the polymer by continuously and cyclically removing free radicals that are
produced by photo-oxidation of the polymer. The overall process is sometimes referred to as
the Denisov cycle and is exceedingly complex. Broadly, HALS react with the initial polymer
peroxy radical and alkyl polymer radicals formed by the reaction of the polymer and oxygen,
preventing further radical oxidation. By these reactions HALS are oxidised to their
corresponding aminoxyl radicals, however they are able to return to their initial amine form
via a series of additional radical reactions. HALS's high efficiency and longevity are due to
this cyclic process wherein the HALS are regenerated rather than consumed during the
stabilization process.
Growing usage as thermal stabilizers. HALS are also increasingly being used as thermal
stabilizers, particularly for a low and moderate level of heat, however during the high
temperature processing of polymers (e.g. injection molding) they remain less effective than
traditional phenolic antioxidants.
Satellite products would accelerate revenue growth of core products
Clean sciences is evaluation new products which will complement existing products: (1) agro
intermediate which is a phenol derivative, (2) complementary anti-oxidant products to BHA
which can boost the cross-selling for the latter, (3) Veratrol which is a downstream for
Guaiacol and gets used across agro, pharma. Solvay is a global competitor here.
New plant (Unit#4) would house more new products in HALS series
Unit-4 would be used for multiple new products including HALS, and is expected to
contribute to revenue from 2HFY23. CST is targeting products where it has no domestic
manufacturer and globally only 5-6 players are present. Margin in new products would be
initially lower but will improve gradually as has been the case with existing products led by
yield improvement and improved scale. CST has recently brought 70acre plot to drive further
expansion.

GROWTH MOMENTUM TO CONTINUE

We estimate CST’s earnings to grow at 27% CAGR over FY2021-24E led by (1) 21% growth in existing
products and (2) Rs1.5 bn revenue addition from new products by FY2024. We estimate margins to come
down from the peak of FY2021 due to high raw material costs and relatively lower margin of new products,
but still the best in the sector.
New products would continue to drive growth

CST’s growth over FY2018-21 has been impressive with revenue growing at 29% CAGR and
EBITDA growing at 53% CAGR. Revenue growth slowed down to a single digit in FY2020
due to a slowdown in China market due to the pandemic in the last quarter leading to a
shutdown of one of the plants. After muted growth in FY2020, CST clocked double digit
growth in FY2021. We estimate CST to continue this growth momentum driven by
expansion in existing products and launch of new products. We expect new products to
contribute Rs1,548 mn by FY2024E, driving 27% revenue CAGR over FY2021-24E.
Exhibit 19: CST would continue to grow led by expansion in existing products and new products
CST’s revenue (Rs bn) and growth (%, yoy), March fiscal year-ends, 2018-24E
Revenue (Rs bn, LHS) Growth (%, RHS)

12 70
10 60
50
8
40
6
30
4
20
2 10
0 0
2018 2019 2020 2021 2022E 2023E 2024E
Exhibit 20: FY2021-24E growth would be led by both existing and new products
CST’s revenue breakdown by existing products and new products (Rs mn)
12,000
10,000
8,000
6,000
4,000
2,000
-
FY2021 revenue Existing products New products FY2024 revenue
expansion

We expect FY2022E margin to decline from the peak of FY2021 due to high raw material
pressure. We further expect margins to remain at the FY2022E level going ahead as new
products will initially be at lower margins compared to existing products. CST’s capex would
increase as the company enters into new products.
Exhibit 21: Gross margin peaked in FY2021 Exhibit 22: EBITDAM to improve after slight dip in FY2022E
CST’s gross margin (%), March fiscal year-ends, 2018-24E CST’s EBITDA margin (%), March fiscal year-ends, 2018-24E
Gross margin (%) EBITDA margin (%)

80 55
75 50
70
45
65
40
60
35
55
50 30
45 25
40 20
2018
2019
2020
2021
2022E
2023E
2024E
2018
2019
2020
2021
2022E
2023E
2024E
Management performance bonus capped at 4% of PBT
CST’s cumulative performance bonus component of the total compensation for the whole
time directors comprising the managing director and other two whole time directors in
FY2021 was ~10% of FY2021 PBT. This amount has been brought down to 4% of FY2022
PBT as a prudent governance practice. We have taken the performance component of
remuneration for the directors at 4% of PBT into our estimates.
Exhibit 23: Performance bonus of whole time directors/managing directors capped at 4% of PBT
Promoter family compensation structure for 2021-22, March fiscal year-ends
2021 Remuneration (Rs mn) 2022 Remuneration (Rs mn)

Fixed Performance bonus Fixed Performance bonus
Ashok Ramnarayan Boob 24.2 121.9 25.0
Siddhartha Ashok Sikchi 16.5 83.1 22.5
Krishnakumar Ramnarayan Boob 12.4 62.3 15.0
Total 53.1 267.3 62.5
as % PBT 10.0% Capped at 4% of PBT

Exhibit 24: CST’s revenue growth over FY2021-24E would be driven by performance chemicals and new products
CST’s revenue breakdown, March fiscal year-ends, 2018-24E
Segmental revenue (Rs mn) 2018 2019 2020 2021 2022E 2023E 2024E
Performance chemicals (MEHQ, BHA, AP) 1,469 2,490 2,721 3,548 4,166 5,266 6,199
Pharmaceutical intermediates (Guaiacol, DCC) 499 681 644 830 1,128 1,466 1,613
FMCG intermediates (4-MAP, Anisole) 332 612 666 632 757 879 967
New products (HALS, Veratrole, etc.) — — — — 99 545 1,548
Other products (co-products such as TBHQ) 38 65 63 59 80 100 200
Total 2,337 3,848 4,093 5,069 6,231 8,256 10,527
Growth (yoy, %)
Performance chemicals 69.5 9.3 30.4 17.4 26.4 17.7
Pharmaceutical intermediates 36.5 -5.5 28.9 35.9 29.9 10.0
FMCG intermediates 84.6 8.7 -5.1 19.8 16.1 10.0
New products — — — — 451.2 184.3
Total 65% 6% 24% 23% 32% 28%
Contribution to total revenue (%)
Performance chemicals 62.9 64.7 66.5 70.0 66.9 63.8 58.9
Pharmaceutical intermediates 21.3 17.7 15.7 16.4 18.1 17.8 15.3
FMCG intermediates 14.2 15.9 16.3 12.5 12.2 10.7 9.2
New products 0.0 0.0 0.0 0.0 1.6 6.6 14.7
Notes:
(a) Some of the new products could also be classified into existing segments.
Source: Kotak Institutional Equities estimates
Impressive capital allocation track record
CST’s impressive capital allocation is also observed from its sector leading RoCE. The
company has relied on cash generated from operations to fund its capex requirements. The
recent IPO was OFS only without any primary raise. We believe that CST would continue to
maintain superior RoCE with a slight drop from the peak of FY2021levels as it enters into
new products. CST’s capex will increase going ahead but can be supported through internal
accruals.
Exhibit 25: Cash from operations is the primary source of funds Exhibit 26: Funds primarily for capex and investments
CST’s source of funds (2018-21), March fiscal year-ends (Rs mn) CST’s application of funds (2018-21), March fiscal year-ends (Rs mn)
6,000 2,500
5,000 2,000
4,000
1,500
3,000
1,000
2,000
500
1,000
0
0 Capex Dividends paid Buyback of Others
CFO Dividend/interest received equity
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Exhibit 27: Consolidated income statement of CST, March fiscal year-ends, 2018-24E (Rs mn, unless specified)
2018 2019 2020 2021 2022E 2023E 2024E

Profit and loss model
Revenue 2,411 3,933 4,193 5,124 6,296 8,332 10,603
Raw material costs (1,133) (1,712) (1,292) (1,236) (1,833) (2,384) (3,034)
Gross profit 1,277 2,221 2,901 3,888 4,463 5,948 7,569
Employee expenses (205) (311) (383) (436) (403) (517) (651)
Other expenses (342) (545) (665) (863) (1,007) (1,279) (1,558)
EBITDA 730 1,365 1,854 2,590 3,052 4,152 5,359
Depreciation and ammortization (76) (110) (137) (172) (187) (234) (276)
EBIT 654 1,254 1,717 2,417 2,866 3,918 5,083
Interest expenses (1) (0) (1) (1) (2) (2) (2)
Other income 46 113 109 256 225 250 275
Profit before taxes 700 1,367 1,824 2,673 3,089 4,166 5,356
Tax (212) (389) (427) (689) (792) (1,041) (1,339)
PAT 487 978 1,397 1,984 2,297 3,124 4,017
EPS (Rs) 4.6 9.2 13.2 18.7 21.6 29.4 37.8
Key metrics (%)
Gross margin 53 56 69 76 71 71 71
EBITDA margin 30 35 44 51 48 50 51
PAT margin 20 25 33 39 36 37 38
Employee cost as share of revenue 9 8 9 9 6 6 6
Other expenses as share of revenue 14 14 16 17 16 15 15
Growth rates (%)
Revenue 27 63 7 22 23 32 27
Gross profit 4 74 31 34 15 33 27
EBITDA 1 87 36 40 18 36 29
PAT 4 101 43 42 16 36 29

Exhibit 28: Consolidated balance sheet of CST, March fiscal year-ends, 2018-24E (Rs mn, unless specified)
2018 2019 2020 2021 2022E 2023E 2024E

Balance sheet
Share capital 14 14 13 106 106 106 106
Reserves and surplus 1,864 2,706 3,408 5,290 7,358 10,170 13,785
Total equity 1,879 2,721 3,421 5,397 7,464 10,276 13,891
Borrowings 1 1 3 3 3 3 3
Deferred tax liabilities 102 139 102 176 176 176 176
Total non-current liabilities 103 140 105 179 179 179 179
Trade payables 264 223 357 610 749 992 1,262
Short-term borrowings — 25 24 — — — —
Other current liabilities 116 191 416 414 508 673 856
Total current liabilities 380 414 773 1,024 1,257 1,664 2,118
Total equity and liabilities 2,361 3,275 4,299 6,599 8,900 12,119 16,188
Net block 1,024 1,270 1,656 1,858 2,472 3,637 4,361
Capital work in progress 15 39 34 550 550 550 550
Other non-current assets 178 752 1,330 2,321 2,321 3,321 4,321
Total non-current assets 1,217 2,062 3,020 4,730 5,343 7,508 9,232
Inventories 290 370 346 529 650 860 1,095
Receivables 397 598 698 742 912 1,207 1,536
Cash and bank balances 295 94 93 93 1,375 1,722 3,280
Other current assets 162 151 142 505 620 821 1,045
Total current assets 1,144 1,213 1,279 1,870 3,558 4,610 6,956
Total assets 2,361 3,275 4,299 6,599 8,900 12,119 16,188
Key metrics and ratios
Net debt/equity (X) (0.4) (0.1) (0.0) (0.0) (0.4) (0.4) (0.6)
RoAE (%) 28 40 43 43 35 35 33
RoACE (%) 27 39 42 41 33 33 32
ROIC (%) 33 48 66 74 66 63 66

Exhibit 29: Consolidated cashflow statement of CST, March fiscal year-ends, 2018-24E (Rs mn, unless specified)
2018 2019 2020 2021 2022E 2023E 2024E

Cashflow statement
Profit before taxes 703 1,365 1,8 23 2,673 3,08 9 4,166 5,356
Depreciation 76 110 137 172 18 7 234 276
Finance costs (3) (7) (55) (29) (225) (250) (275)
Other miscellaneous (20) (57) (13) (78 ) (0) — (0)
Operating cashflow before working capital 756 1,412 1,8 93 2,737 3,050 4,150 5,357
Change in working capital (8 7) (209) 131 (150) (172) (299) (334)
Direct taxes paid (220) (355) (424) (659) (792) (1,041) (1,339)
Cashflow from operations 449 847 1,600 1,928 2,087 2,809 3,685
Net Capex (320) (391) (504) (8 40) (8 00) (1,400) (1,000)
Net investments 137 (573) (562) (1,078 ) — (1,000) (1,000)
Interest and dividend received 8 14 3 50 225 250 275
Cashflow from investing (175) (950) (1,063) (1,868) (575) (2,150) (1,725)
Proceeds from borrowings 1 20 1 (24) — — —
Issue of equity/(buyback) — — (491) — — — —
Dividends paid (51) (128 ) (63) (35) (230) (312) (402)
Cash flow from financing (50) (108) (553) (59) (230) (312) (402)
Free cash flow 132 464 1,151 1,118 1,512 1,659 2,960
Key ratios
Cash conversion cycle (days) 60 55 61 53 53 53 53
Inventory days 44 34 30 38 38 38 38
Receivable days 60 55 61 53 53 53 53
Payable days 44 34 30 38 38 38 38

KEY RISKS
Key downside risks for CST investors stem from (1) high dependency on promoters for various functions given
early stages of professionalization of business management, (2) process disruption risks for MEHQ/BHA which
contribute ~70% of revenues and even larger profit pools, (3) high expectations from the company to
consistently find successes like MEHQ/BHA. Key upside risks include significant success in HALS, anti-dumping
duties on DCC and consolidation in the BHA/MEHQ market.
Promoters drive ‘key man’ risk
Siddharth Sikchi and Ashok Boob are the key architects of CST’s success from a product
standpoint. Siddharth’s deep understanding of chemistry, the time bound pursuit of new
product development even with limited resources, and ability to identify new products by
double hatting the business development function are valuable for the business. This has
driven CST’s uncommon success; the company has managed both high RoCEs and rapid
growth in a reasonably short time frame.
Ashok Boob’s maturity, technical understanding and years of experience in running

chemicals businesses also drive cohesion and mutual respect among the promoters. This also
accelerates decision making and more importantly cost efficient execution. Siddharth trained
under Ashok post his chemical engineering degree and considers him as his mentor. As a
younger organization, promoters are also building a second line by hand picking their first
layer of function heads and working with them to impart the company’s DNA. This would
gradually create a succession over the next few years.
Promoter family has so far led the company efficiently with each of the four members
having complementary skill sets and clearly defined functions such as R&D, marketing,
finance, operations, compliance etc. These also help in maintaining cohesion and an efficient
decision making process.
That said, promoters are hardcore entrepreneurs and enjoy building new businesses. Ashok
and Krishna boob exited Mangalam Drugs & Organics and eventually built CST. Siddharth’s
family too has two other businesses, one run by his father and one run by his brother. Any
exits from the promoter side to pursue another business on their own may be a challenge
for the company for new product development.
Process disruption risks
MEHQ and BHA drive most of the profit pool for CST. Existing competitors Solvay and
Camlin are using processes which make them less competitive and provide little threat to
CST’s market share gains. CST and Solvay too have refrained from aggressive actions either
on pricing or on working capital discipline. There is a substantial difference in terms of gross
margins for CST (~70-80%) versus peers (30-40%). This is also a key reason why we believe
CST would continue to gain market share. However, if new competition comes in which has
an even more differentiated process or provides alternatives for MEHQ/BHA, it may impact
CST’s profits.
High expectations from company to consistently find successes like MEHQ/BHA
Our FV builds in 25% topline growth from FY2021 to FY2037 though we expect EBIT
margins to gradually come down by 16 ppt from 51% in FY2021. Even with 31% EBIT
margin, this would be materially higher than peers which are in the 15-25% margin range.
This essentially means that CST would continue replicating success similar to MEHQ/BHA
consistently every few years. We believe margins are likely to remain healthy due to CST’s
differentiated process capabilities and a relatively soft revenue base. Revenue growth and
healthy margins at least have clear visibility over the next five years. Additionally, sector
tailwinds will continue to help CST find successful products consistently.

Upside risks to our estimates come from possibility of consolidation
Given CSTs sustained (and improving) cost leadership over the past many years, we believe
there is a possibility of consolidation in BHA and MEHQ markets, driving further market
share gain for CST.
HALS is a large opportunity if executed well. While the management has only announced
the definite success on two products, there are multiple opportunities in HALS. CST can
establish cost leadership in these products as well if it successfully manages to use catalytic
reactions and backward integrate itself.
The Government is considering imposing anti-dumping duties on DCC which may result in
significantly higher volumes and margin for CST. A verdict on the same is likely to be
announced soon.

COMPANY PROFILE: LARGEST PRODUCER FOR FOUR OF ITS SEVEN PRODUCTS

CST is the world’s largest producer for—(1) Anisole, (2) BHA, (3) MEHQ and (4) 4-MAP; it is also among the
largest producers for its other three products—(1) Guaiacol, (2) DCC and (3) L-Ascorbyl Plamitate. Through its
R&D-driven catalytic process, backward integrated nature of operations and cost-competitive process, the
company has emerged as the highest-margin chemical company in India. Its chemistry and R&D skills are
highlighted by CST being the only global player to have been able to commercialize certain manufacturing
processes like vapour phase Anisole production. CST has longstanding relationships with its clients, some
exceeding over 10 years.
CST is the world’s largest player for certain specialty chemicals

CST is among a few companies across the globe focused on developing new technologies
using in-house processes, which are both eco-friendly and cost-competitive, some of which
have been commercialized for the first time globally. CST has emerged as the largest
manufacturer of certain specialty chemicals in terms of manufacturing capacities driven by
its focus on—(1) process innovation, (2) product identification, (3) catalyst development and
(4) strategic backward integration. Some of these technologies have been developed and
commercialized for the first time globally
CST manufactures functionally critical specialty chemicals across—(1) performance

chemicals—comprising MEHQ, BHA and AP, (2) pharmaceutical intermediates—comprising
Guaiacol and DCC and (3) FMCG chemicals—comprising 4-MAP and Anisole.
CST’s products are used as polymerization inhibitors, intermediates for agrochemicals and
pharmaceuticals, anti-oxidants, UV blockers, and anti-retroviral reagents, which are used
across several industries, including in the manufacture of paints and inks, agro-chemical,
pharmaceuticals, flavors and fragrance, food and animal nutrition (feed), and personal care
(cosmetics) products.
CST’s key customers include Bayer AG, SRF, Gennex Laboratories, Nutriad International NV
and Vinati Organics.
Exhibit 30: Products manufactured by CST find applications across several industries
Key products manufactured by CST and their applications
Product Application Industry

Polymerization inhibitor inacrylics, methacrylics and other acrylates,
vinyl acetate monomers and unsaturated polyesters Acrylic fibers, paints and inks, adhesives, super
MEHQ
absorbent polymers, agro-chemicals.
Stabilizer for cosmetics, liquid detergents, and cellulose materials
Pre-curser for vanillin production, and in the synthesis of
Pharmaceuticals, flavours and fragrances, and
Guaiacol pharmaceuticals. Majorly used as a reducing co-substance for COX
agriculture
reactions, as an expectorant and antiseptic.
Food packaging, animal feed, rubber, cosmetics and
BHA Synthetic antioxidant
petroleum products.
Spice, medicine and make-up intermediate, ingredient for UV filters, Personal care (cosmetics), flavors and fragrance
4-MAP
cigarette additive and flavouring in food industry
Used for the preparation of amides, esters, and anhydrides. Also

DCC Pharmaceuticals
used as a reagent in anti-retroviral drugs
Personal care, topical drugs in dermatology to
Ascorbyl Palmitate Anti-oxidant properties for anti-aging products
prevent hyperpigmentation and photo-aging
Anisole Precursor to perfumes, insect pheromones, and pharmaceuticals. Cosmetics, pharmaceutical and agrochemicals
Source: Company

Key factors relevant to the company’s operations

Competition—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. From the product testing
stage, to the batch procurement phase, to the eventual customer approval stage—acquiring
a new end customer could take a few years depending on product complexity. The company
faces competition from both domestic and MNCs on the basis of pricing, relationships with
customers, product quality and process innovation. With globally comparable manufacturing
capacities, and as one of the key companies focusing green chemistries, CST is well-
positioned to leverage the growing demand for clean products globally, in order to grow its
market share.
R&D—CST has two R&D units within the premises of the company manufacturing facilities.
R&D activities are focused on—(1) designing catalysts to create new manufacturing
processes, (2) improving existing processes and (3) developing new chemistries to develop
eco-friendly processes by eliminating use of toxic starting materials and improve the
commercial viability of finished products.
The company’s R&D abilities have led to the identification, design and customization of
catalysts that are used across the company processes in order to improve yields, reduce
effluents and increase cost competitiveness. CST has designed, developed and regenerated a
catalyst for manufacturing Anisole from phenol and methanol. The catalyst is used in a
vapor-phase reaction that eliminates the use of conventional starting materials of DMS and
caustic soda that generate effluent. Through the catalytic production process for Anisole,
CST generates only water as an effluent.
R&D activities are structured across three verticals—(1) existing products and catalyst
systems—to improve yields and selectivity in the existing product portfolio, (2) expanding the
product portfolio in stabilizers and additives business and (3) identifying products with high
demand that only limited manufacturers produce within India and globally.
Raw materials—the primary raw materials used in the manufacture of products include
crude oil derivatives such as phenol and other commodities such as hydrogen peroxide.
Other raw materials used include—(1) acetone, (2) cyclohexylamine, (3) methanol, (4)
tertiary butyl alcohol and (5) acetic anhydride. RM is procured from both domestic and
international markets using a mix of spot contracts and fixed-price agreements. As the term
of supply agreements is limited to a few months, the company is subject to the risk of an
increase in the prices of raw materials.
Manufacturing facilities—CST has two manufacturing facilities at Kurkumbh (Maharashtra)

and are strategically located at close proximity to the JNPT Port. Power requirements for the
facilities are met through the local state power grid and partly through the captive solar
plants; water is procured from the Maharashtra Industrial Development Corporation. Each
facility includes effluent treatment plants equipped with aerobic as well as anaerobic systems.
These effluent treatment plants treat industrial waste water and recycle it for reuse, making
both facilities zero liquid discharge facilities.
In order to meet the growing market demand for key products and develop and introduce
new products, CST is setting up two new manufacturing facilities, located adjacent to its
existing facilities. The third facility is proposed to be used to manufacture Anisole and certain
performance chemicals, including MEHQ and BHA. The company also acquired land for the
fourth facility, to manufacture stabilizer and other intermediates for application in
pharmaceutical, flavors and fragrance and agriculture industries. CST intends to add capacity
in a phased manner to ensure optimal capacity utilization levels.

Exhibit 31: CST has more than doubled its overall capacity since FY2018
CST’s capacity, production and utilization trends, March year-ends, 2018 onwards (tons, %)
2018 2019 2020 2021

Annual installed capacity ( metric tons)
Performance Chemicals 5,38 8 8 ,58 0 8 ,68 0 9,640
Pharmaceutical Intermediates 2,052 3,060 3,78 0 4,060
FMCG Chemicals 6,600 9,600 15,600 16,200
Total 14,040 21,240 28 ,060 29,900
Production (metric tons)
Performance Chemicals 3,459 4,8 04 5,363 7,08 1
Pharmaceutical Intermediates 1,527 2,143 1,942 2,602
FMCG Chemicals 5,138 7,471 10,360 11,8 26
Total 10,124 14,418 17,665 21,509
Capacity utilization (%)
Performance Chemicals 64.2 56.0 61.8 73.5
Pharmaceutical Intermediates 74.4 70.0 51.4 64.1
FMCG Chemicals 77.8 77.8 66.4 73.0
Total 72.1 67.9 63.0 71.9
Exhibit 32: Promoters hold 78.5% of the company

CST’s shareholding pattern
Public, 21.5%
Promoter and
promoter group,
78 .5%
CST – History
CST started its operations in 2008. The first plant came up in the year 2009 where CST
started commercial production of MEHQ and Guaiacol, the first company to have
commercialized this technology (of producing these from Anisole) on a global platform.
In 2011 it added a third product called para methoxyacetophenone (MAP), again using a
very interesting catalytic process and the only company globally to be producing it through
the Anisole route. In 2014 came the fourth product, which was forward integration of
MEHQ into BHA, again via a catalytic process, only the second company globally doing this.
In 2018. In 2020 CST added another product, called DCC i.e. dicyclohexylcarbodiimide,
which is used as a pharmaceutical intermediate.

CST sells its products directly as well as through distributors
CST’s customers comprise direct end-use manufacturers as well as institutional distributors

with majority of its revenues being generated from direct sales to customers. Some of CST’s
key customers include Bayer AG and SRF for agro-chemical products, Gennex Laboratories
for pharmaceutical intermediates, Vinati Organics for specialty monomer products, and
Nutriad International NV for animal nutrition. Some customers have been associated with
the company for over 10 years.
CST’s products are largely key starting materials
CST’s products are used as key starting level materials, as inhibitors, or additives by their
customers for finished products and sale in regulated markets. Customer engagements are
dependent on delivering quality products, and it can take a few years to approve suppliers,
based on—(1) quality control systems and (2) product approvals across jurisdictions by
multiple regulators. Due to the resources involved in engaging with new suppliers,
customers are less inclined to pursue alternate supply sources, providing CST with an
advantage over new entrants that would need to make significant investments and endure a
long gestation period with potential customers.
Manufacturing facilities
CST has three manufacturing facilities in India with 12 production lines (including three lines
for catalyst production and regeneration), with a total installed capacity of 29,900 MTPA as
of March 31, 2021, located at Kurkumbh (Maharashtra).
Key products have dedicated production lines which limit losses and capacity reductions that
are typically incurred during transitioning between products. Multiple lines across separate
units for key products limit contagion risk and enable CST to consistently meet the demand
for these products.
Each facility is equipped to function independently, with its own quality department,
effluent treatment plant, warehouse and R&D center. All facilities are automated to a large
extent, which helps ensure consistent product quality and reduced costs, mitigating
exposure to human error and industrial accidents involving labor force.

"Each of the analysts named below hereby certifies that, with respect to each subject
company and its securities for which the analyst is responsible in this report, (1) all of the
views expressed in this report accurately reflect his or her personal views about the subject
companies and securities, and (2) no part of his or her compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or views expressed in this
report: Ritesh Gupta, Prasenjit Bhuiya."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.
60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.
40% * The above categories are defined as follows: Buy = We expect

32.5% this stock to deliver more than 15% returns over the next 12
30% 27.4% months; Add = We expect this stock to deliver 5-15% returns
23.6% over the next 12 months; Reduce = We expect this stock to
deliver -5-+5% returns over the next 12 months; Sell = We
20% 16.5% expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
10% basis. These ratings are used illustratively to comply with
4.2% 4.2% 2.8% applicable regulations. As of 30/06/2021 Kotak Institutional
0.5%
Equities Investment Research had investment ratings on 212
0%
equity securities.
BUY ADD REDUCE SELL
Source: Kotak Institutional Equities As of June 30, 2021
Clean Science & Technology (CLEAN IN)

Kotak Institutional Equities rating and stock price target history
2,500 70,000
60,000
2,000
50,000
1,500
40,000
30,000
1,000
20,000
500
10,000
Stock Price
- 0
Jun-19
Jun-20
Jun-21
Apr-19
Apr-20
Apr-21
Oct-18
Feb-19
Oct-19
Feb-20
Oct-20
Feb-21
Aug-18
Aug-19
Aug-20
Aug-21
Dec-20
Dec-18
Dec-19
Index
Price
Source: Kotak Institutional Equities Research for ratings and price targets, Bloomberg for daily closing prices.
BSE-30 Index (RHS) Covered by Ritesh Gupta

Price target Not covered by current analyst
The price targets shown should be considered in the context of all prior published Kotak Institutional Equities research, which may or may
not have included price targets, as well as developments relating to the company, its industry and financial markets

Analyst coverage
Companies that the analyst mentioned in this document follow
Covering Analyst: Ritesh Gupta

Company name Ticker
Aarti Industries ARTO IN
Atul ATLP IN
Bayer Cropscience BYRCS IN
Clean Science & Technology CLEAN IN
Crompton Greaves Consumer CROMPTON IN
Dhanuka Agritech DAGRI IN
Godrej Agrovet GOAGRO IN
Havells India HAVL IN
Navin Fluorine NFIL IN
PI Industries PI IN
Polycab POLYCAB IN
Rallis India RALI IN
SRF SRF IN
Tata Chemicals TTCH IN
UPL UPLL IN
Vinati Organics VO IN
Voltas VOLT IN
Whirlpool WHIRL IN
Source: Kotak Institutional Equities research

Disclosures
Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our Fair Value estimates are also on a 12-month horizon basis.
Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may not strictly be in
accordance with the Rating System at all times.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations:
Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and fair value, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak
Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in
certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and fair value, if any, for this stock, because there is not a sufficient fundamental
basis for determining an investment rating or fair value. The previous investment rating and fair value, if any, are no longer in effect for this stock and should not be relied
upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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Company Report

Clean Science & Technology (CLEAN) REDUCE

Differentiated business backed by technocrat promoters

Flurry of new product launches in existing and new range

Premium valuations a function of superior FCF generation and faster growth

Company data and valuation summary

Financial snapshot ........................................................................................... 3

Valuation, like Beauty, is in the eye of the beholder......................................... 4

Process-led differentiation drives global market leadership .............................. 7

CST has multiple traits of a scalable business ................................................. 10

Growth momentum to continue .................................................................... 19

Key risks ........................................................................................................ 25

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Revenue EBITDA PAT EPS P/E EV/EBITDA RoE RoCE

Source: Company, Kotak Institutional Equities estimates

2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

VALUATION, LIKE BEAUTY, IS IN THE EYE OF THE BEHOLDER

Rich valuations a function of the differentiated DNA

 Differentiated processes drive ability to protect margins. CST differentiates versus

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Our DCF valuation factors long-term growth opportunity

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Relative valuations: premium is a function of higher RoCEs

Source: Company, Kotak Institutional Equities estimates

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

PROCESS-LED DIFFERENTIATION DRIVES GLOBAL MARKET LEADERSHIP

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

Vapour phase reaction

CHA DCU DCC

Key raw material End product Effluent

Source: Kotak Institutional Equities

Conversion of Anisole to MEHQ and Guaiacol is also a unique process

Full backward integration and largely India-based supply chain

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Global leadership in existing products

Global market CST

Camlin Fine Sciences

Hongrui Fine Chemicals

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

CST HAS MULTIPLE TRAITS OF A SCALABLE BUSINESS

Experienced promoters with extensive domain knowledge

Ashok Boob Over 25 years of work experience in the

Close to two decades of expertise in the

Source: Company, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Designation Joining Previous experience Qualifications

Scientist, University of California, PhD (Tulane University), B.Tech and

Mirae Asset Capital markets,

Source: Company, Kotak Institutional Equities

A strong board right from the early days

Name Position Remarks

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

Steady track-record on financials and capital allocation

Source: Company, Kotak Institutional Equities

2018 2019 2020 2021 2022E 2023E

Source: Companies, Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

2018 2019 2020 2021 2022E 2023E

Source: Companies, Kotak Institutional Equities estimates