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Focus on R&D and green chemistry…

to have sustainable earnings impact

Clean Science (CLEAN)’s FY22 Annual Report highlights its vision to explore growth and expansion opportunities by focusing on process innovation in sync with products. Launch of new products, capacity expansion of existing products and foray into new product segments backed by a strong R&D pipeline will surely propel CLEAN into its next leg of growth. We maintain our Neutral rating on the stock with a target price of INR1,660.

Lower margins amid high input and energy costs in FY22

 * CLEAN’s revenue increased 34% YoY to INR6.8b in FY22 aided by strong growth in export markets, increased share with customers, better realizations and launch of new products.

* Its gross profit rose 18% YoY to INR2.2b in FY22; although, gross margin contracted 870bp due to unprecedented raw material cost inflation.

* COVID-led disruptions resulted in higher fuel and logistics costs; consequently, EBITDAM posted a 670bp contraction. CLEAN’s PAT grew 15% YoY to INR2.3b.

* The company generated INR1.3b cash from operations, implying a decline of 34% YoY. CLEAN incurred the highest-ever capex of INR1.4b (+66% YoY) for capacity expansion in FY22.

Pioneer in Hindered Amine Light Stabilizers (HALS) in India

? CLEAN has developed key products in the HALS series using in-house R&D capabilities at lab and pilot scales. It is setting up lines of two such products in Unit-III of the manufacturing facilities and the other lines would come up in UnitIV (under its wholly owned subsidiary, Clean Fino-Chem Ltd.) that CLEAN has recently acquired. The Unit-III lines are likely to be commercialized in 2HFY23.

? Development of the HALS series would diversify CLEAN’s product portfolio and helps it enter into polymer/ paint customer base by developing UV stabilizers, which have the same customer base.

? This product range finds application in various end-user industries including polymerization inhibitor, water treatment, paints, plastics and coatings (refer to Exhibit 2). The current estimated global market size of HALS is USD1b (reporting a CAGR of 10%) and CLEAN is the first domestic company to foray into HALS.

Capacity expansions and new product launches are the highlights of FY22

* Capacity expansions and new product launches are the highlights of FY22 ? The company was in an expansion mode in FY22 and incurred a capex of INR1.4b during the year, which was funded through internal accruals. CLEAN was in net cash position at the end of FY22. The future capex that would be incurred by the company would also be funded through internal accruals and CLEAN would continue to remain net debt free.

The company commissioned two new products in Unit-III of its manufacturing facilities, p-BQ and TBHQ, wherein p-BQ is an import substitution product used in the agro and monomer industry with CLEAN being the only manufacturer in India. TBHQ is used as a stabilizer in edible oil and it will increase the wallet share of the company with its customers.

* The company also expanded its capacities of existing products during the year. Anisole capacity was almost doubled with the capacity of BHA expanding by 50%. The company also plans to increase the capacities of MEHQ, Guaiacol and p-BQ in FY23. P-BQ is seeing strong traction from the end-user industries and the capacities were fully utilized earlier than anticipated by the management.

R&D: the backbone of CLEAN’s operations

* Since its inception, the company’s focus has been on commercializing cleaner and greener technologies as well as processes in India. This would not have been possible without having a strong R&D base and infrastructure. CLEAN is one of the few companies globally to work on developing a catalyst and then using it for commercial production.

* The core focus areas of the company in R&D are: new product development largely in the performance chemicals segment (largest and fastest growing segment), continuously improving yields and efficiencies of existing processes and developing new intermediates that can address import substitution.

* CLEAN is the only company globally to use a novel catalyst to manufacture Anisole from Phenol using vapor phase technology, manufacture MEHQ + Guaiacol from Anisole using hydroxylation and manufacture 4-MAP from Anisole using acetylation.

* The company is focusing on enhancing its R&D initiatives, further building efficiency, and improving processes to bring down the Greenhouse Gas (GHG) emission level by another 5%. CLEAN has cut its GHG Scope 1 emissions to 4.12mt/mt of production in FY22 from 4.74mt/mt of production in FY19 and GHG Scope 2 emissions to 0.38mt/mt of production in FY22 from 0.87mt/mt of production in FY19.

Valuation and view

* CLEAN has acquired land for Unit IV and all the projects in this unit would be under its wholly owned subsidiary, Clean Fino-Chem Ltd., which will focus on stabilizers and other downstream intermediates that find use in Pharma and Agro industries.

* The company is likely to generate an FCF of INR4.3b over FY23-24E, with a capex of INR2.5b planned over this period. It is funding this capex via internal accruals and will remain net cash going forward.

* The stock is trading at 42x FY24E P/E, with an EPS of INR41.5, and FY24E EV/EBITDA of 32x. We value CLEAN at 40x FY24E EPS to arrive at our TP of INR1,660. Maintain Neutral

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