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Minor blip; long-term growth story intact

In 2QFY23, Clean Science’s reported revenue growth was 3% below our estimates on account of sequential decline in pharma and agro chemical segment sales. Gross margin saw a decent improvement driven by i) product mix and higher realisation, and ii) softer raw material prices. However, on account of sharp jump in other expenses, EBITDA was 6% below our expectation (still 3% above consensus). Clean’s much-awaited HALS series of products are likely to get commercialised in Nov’22. Going ahead, the management indicated a softer 3QFY23 and a relatively stronger 4QFY23. It foresees good ramp-up of its HALS products, as it is the only sustainable supplier from India catering to domestic demand. We believe the rampup of HALS products and higher volumes of existing products (double capacity of PBQ, etc.) bodes well for robust medium-term growth. We keep our estimates unchanged. We maintain BUY with an unchanged Sep’23 TP of INR 2,485 despite rich valuations as we continue to believe that Clean would emerge as a preferred long-term supplier owing to its clean and sustainable chemistries.

* EBITDA miss on JMFe due to higher other expenses and marginal sales miss: Clean Science’s 2QFY23 consolidated gross profit was only 2% below JMFe at INR 1.55bn (up 8%/47% QoQ/YoY) as revenue was 3% below JMFe (in line with consensus) and stood at INR 2.5bn (up 6%/62% QoQ/YoY) while gross margin was 103bps better than anticipated at 62.5% (vs. JMFe of 61.5% and 61.0% in 1QFY23). Moreover, due to higher other expenses of INR 467mn (vs. JMFe of INR 430mn and INR 414mn in 1QFY23), EBITDA came in 6%/ below JMFe (still above 3% on consensus) at INR 975mn (up 7%/42% QoQ/YoY). Further, due to higher other income, PAT was 5% below JMFe and consensus and stood at INR 679mn (up 8%/27% QoQ/YoY).

* Sequential decline in pharma and agro sales resulted in sales miss: During 2QFY23, Clean’s performance chemicals revenue was 3% below JMFe and stood at INR 1.66bn (up 8%/47% QoQ/YoY) driven by a) ramp-up of TBHQ, and b) better realisation and volume growth across older products. FMCG chemicals revenue was 16% ahead of JMFe and stood at INR 300mn (up 6%/62% QoQ/YoY) likely on account of higher volume and realisation of 4-MAP. However, pharma and agro intermediates were 26% below JMFe and stood at INR 440mn (down 17% still up123% QoQ/YoY)

* Import substitution story to reap rich dividends going forward: HALS 770 current import volume is ~3,000 MT and Clean has an installed capacity of 2000MT at its Unit-3. This gives the company roughly c.50% legroom for expansion at current demand levels. Global demand for HALS is upwards of 12,000 MT and is a burgeoning market. HALS 770 is primarily used in master batches by companies like Alok industries, and Plastiblends whereas HALS 701 is primarily for water treatment/pharma end usage products. The company’s capex of INR 4.0bn over FY23-24 remains on track. We maintain BUY with an unchanged Sep’23 TP of INR 2,485 despite rich valuations as we believe Clean would emerge as a preferred long-term supplier owing to its clean and sustainable chemistries

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