This chemical stock has crashed 15% in one month; is reversal on cards?

Clean Science and Technology had made a solid debut on Dalal Street on July 19 as the stock had listed at Rs 1,784.40 on BSE, a 98.26 per cent premium to its issue price of Rs 900

Shares of Clean Science and Technology surged 9 per cent to Rs 1,568 on the BSE in the intra-day on Monday after brokerage firm Motilal Oswal Financial Services initiated coverage on the stock with a target price of Rs 1,700, an 18 per cent upside from its previous close. The stock eventually ended at Rs 1,468 apiece, 2 per cent higher on the BSE, relative to S&P BSE Sensex's 1.4 per cent gain.

In a report dated August 30, Swarnendu Bhushan and Sarfraz Bhimani, research analysts at MOFSL assigned a 'buy' rating to the company's stock as they believe the company has multiple growth drivers which would enable it to grow at a faster rate than the industry.

"Clean Science and Tech 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. We forecast a revenue/Ebitda/net profit CAGR of 23 per cent/22 per cent/22 per cent over FY21–24," they said in the report, adding, "CSTL is likely to generate free cash flow of Rs 640 crore over FY22–24E, with capex of Rs 300 crore planned over this period – thus funding its capex purely via internal accruals and remain net cash going forward as well".

Clean Science had made a solid debut on Dalal Street on July 19 as the stock had listed at Rs 1,784.40 on BSE, a 98.26 per cent premium to its issue price of Rs 900. On NSE, the scrip listed at Rs 1,755, up 95 per cent. The company's IPO was subscribed 93.41 times, receiving total bids for 1,14,92,30,160 shares against 1,23,02,672 shares on offer. The quota reserved for qualified institutional buyers (QIBs) was subscribed 156.37 times, non-institutional investors 206.43 times, and the retail individual investors (RIIs) quota 9 times.

However, since then, the stock has been in a corrective phase. Over the past one and a half months (since listing), the stock has tumbled 9.2 per cent on the BSE while it has plunged 14.5 per cent in August so far. In comparison, the benchmark S&P BSE Sensex index has rallied nearly 8 per cent this month. Clean Science had hit a 52-week high and low of Rs 1,784.4 and Rs 1,423 on July 19 and August 26, respectively.

Going forward, Bhushan and Bhimani of MOFSL opine that the chemical manufacturing company is set to post strong financial performance driven by its focus on Research and Development (R&D). 

CSTL, they say, started producing Anisole through the liquid phase technology in 2017. Further, through its in-house R&D, the company developed a greener route, vapor phase technology in 2018, making it the only company globally to manufacture via this process.

"Continuing its pursuit of process innovation through catalytic technology, CSTL has forayed into the Hindered Amine Light Stabilizers (HALS) series used in industries such as Polymerization Inhibitor, Water Treatment, Paint, Coatings, etc. The estimated global market size for HALS is $1 billion and CSTL would be the first company to develop HALS series in India," they add.

Given the introduction of (cost-effective) vapor phase technology and continued process innovation, MOFSL expects CSTL's Ebitda (earnings before interest, tax, depreciation, and amortisation) margin to improve to 50.5 per cent in FY21 from 33 per cent in FY16 - resulting in an Ebitda CAGR of 40 per cent over FY16–21 (a 53 per cent CAGR in the last three years). Moreover, it expects revenues to grow at a CAGR of 23 per cent over FY21–24 on the back of capacity additions in phases over FY22.

In an earlier report, analysts at B&K Securities had initiated coverage on the stock with a three-year price target of Rs 1,600.

"Within 17 years of incorporation, the company has grown to become the largest manufacturer globally of monomethyl ether of hydroquinone (MEHQ), Butylated Hydroxy Anisole (BHA), Anisole, and 4-Methoxy Acetophenone (4-MAP)... The company is also in the process of developing a portfolio of stabilizer products. Similarly, it is also engaged in developing catalytic systems to make intermediates for application in high-growth industries including paints and coatings, adhesives and sealants," they said.

The global market for MEHQ, Anisole, and AP is expected to grow approximately 6 per cent over the next five years. For BHA, 4-MAP, and DCC, the market is expected to grow by 4 per cent over the same period.

Lastly, analysts note 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 per cent to its revenues in FY21 and is the biggest market for the company," MOFSL noted in their report.