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Clean Science’s 2QFY24 earnings print was weaker than our and consensus expectations. During the quarter, reported EBITDA was ~6% lower than JMFe and consensus on account of lower realisation (15% realisation decline QoQ) across a majority of products due to overproduction in China. Despite higher contribution (~25%) from non-flagship products, the company was able to make >41% EBITDA margin in 2QFY24. This is in line with our thesis (click here) that despite new product addition, margin contraction would not be as high as the Street is fearing. The company has indicated that commercial production from its new facility (at a capex of INR 3.0bn) will commence from 4QFY24. Further, from the incremental INR 2.0bn capex that the company had announced, it has finalised INR 300mn worth of capex for one pharma intermediate (coming on stream in 9 months) for the domestic market, which could generate INR 1.0bn revenue. Hence, although demand recovery is gradual, the long-term growth trajectory looks promising as the company expands its non-flagship product portfolio. Factoring in 2QFY24 results and commentary, we lower our FY24E/FY25E/FY26E EBITDA estimates by 17%/14%/14% while accounting for higher tax rate; our EPS estimates are lowered by 20%/15%/15%. As a result, our Dec’24 TP is revised to INR 1,790 (from Sep’24 TP of INR 1,995 earlier). We maintain BUY as we look beyond near-term weaknesses and focus on the long-term growth trajectory.

* EBITDA miss on account of higher other expenses: Clean Science’s 2QFY24 consolidated gross profit was in line with JMFe at INR 1.2bn (up 3%/ down 23% QoQ/YoY) despite revenue coming in 5% below JMFe (on account of lower realisation) and stood at INR 1.8bn (down 4%/27% QoQ/YoY) as gross margin was higher than anticipated at 65.9% (vs. JMFe of 63.0% and 61.4% in 4QFY23). During the quarter, other expenses was higher at INR 326mn (vs. JMFe of INR 280mn and INR 277mn). As a result, EBITDA came in 6% below JMFe at INR 748mn (down 2%/23% QoQ/YoY) while PAT was 15% below JMFe and consensus, on account of lower other income, and stood at INR 522mn (down 11%/ 23% QoQ/YoY).

* Intention to take HALS sales to ~200/300MT per month by end-FY24/25: During the quarter, the management indicated that there was realisation pressure in all of its three verticals. The pharma segment offtake was under pressure as recent product recalls of cough syrups continues to lead to reduced demand for Guaiacol. The management, however, expects that Guaiacol demand to bounce back in a quarter as domestic players regain market shares. Currently, the company has been selling ~40-50MT per month of HALS series of products. The management intends to take this run-rate to ~200MT per month by end-FY24 and ~300 MT per month by end-FY25. The company still hasn’t achieved economies of scale in HALS for thinking about backward integration to sebacic acid.

* Estimates lowered; maintain BUY: Factoring in a gradual recovery over the next couple of quarters, we lower our FY24E/FY25E/FY26E EBITDA and EPS estimates by 17%/14%/14% and 20%/15%/15% respectively. As a result, we maintain BUY with a revised Dec’24 TP of INR 1,790 (from Sep’24 TP of INR 1,995 earlier).

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