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HALS launch to drive growth from Q3FY22

Clean Science and Technology’s (Clean Science) Q2FY23 EBITDA margin at 39.4% was up only 40bps QoQ despite softening raw material costs due to drop in PBQ prices, while new products launched by the company have relatively lower margins. Company plans for launch of ‘hindered amine light stabilisers’ (HALS) in Q3FY23 with complete backward integration, but believes margin optimisation may take time. Hence margin may remain stable at current levels before it improves. Clean Science’s first set of HALS production will begin in Nov’22. It has announced another Rs3bn capex in unit-4 to build the entire HALS portfolio, which will likely start production in Dec’23. Company has also built capabilities to manufacture critical intermediates for HALS through in-house catalyst process. We see upside risk to our revenue estimates on HALS commissioning in Nov’22, but have downside to margins; it will have negligible impact on EPS. We therefore keep our estimates unchanged. However, we have cut our P/E multiple to 45x FY24E (from 50x) and the target price to Rs1,540 (from Rs1,700). Maintain HOLD. Key risk: Better than expected HALS performance.

* Revenue growth driven by new products. In Q2FY23, Clean Science revenues grew 61.6% YoY (+5.7% QoQ) to Rs2.5bn. This was driven by the performance chemicals segment wherein revenue grew 47% YoY (+8.5% QoQ) to Rs1.7bn. The segment benefited from capacity addition in MEHQ and guaiacol for which capacity rose 50%, and TBHQ ramp-up. Pharmaceutical intermediates revenue jumped 123% YoY (down 17% QoQ) and benefited from faster ramp-up in the importsubstitution product PBQ, a raw material for agrochemicals. However, PBQ prices have corrected by half to US$16/kg. Company has done capex of Rs630mn for the first set of HALS products in Nov’22.

* EBITDA margin dipped to 39.4% (down 550bps YoY, up 40bps QoQ). Clean Science’s gross profit margin fell 610bps YoY (but rose 150bps YoY) to 62.5%, and gross profit increased by 47% YoY to Rs1.5bn. Company believes margins have benefited from lower raw material prices, but rise in revenue contribution from new products is drag as they generate lower margin. EBITDA was up 42% YoY to Rs975mn. Net profit growth was restricted at 27% YoY to Rs679mn.

* Clean Science plans for further expansion in HALS production. Company said it is advantageously placed in HALS manufacturing as it is fully backward integrated, and KSMs are acetone and ammonia. It will manufacture certain critical intermediates though a catalyst process developed in-house. It has announced Rs3bn capex for HALS in unit-4 to be commissioned by Dec’23. Company will use Rs1bn for building utilities and common facilities; and Rs2bn for production. Asset turnover will be 2.7-3x. The intent is to build the entire HALS portfolio, which will help the company ramp-up its market share globally (HALS’ global market size is US$1.25bn).

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