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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

* 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.

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