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Prices have largely stabilised; focus on new product launches

Clean Science’s 3QFY24 earnings print was better than our and consensus expectations. During the quarter, reported EBITDA was ~6%/3% higher than JMFe and consensus on account of robust volume growth. Looking at the current quarter’s performance, we believe that prices of most of Clean’s products have largely stabilised. Hence, going forward, volume-led growth is likely to continue as there are a lot of new projects kicking in. In 4QFY24, we believe there could be higher one-time expenses for plant commercialisation. However, FY25 onwards, the company’s growth trajectory looks promising as it expands its non-flagship product portfolio. We highlight that, in FY25, the company’s capex of INR 3.6bn (~INR 3.3bn for HALS and INR 300mn for pharma intermediate) will start contributing to the topline along with recovery in volume in its existing products. For FY26, besides higher utilisation of the HALS unit, growth levers will be two pharma intermediates’ capex of INR 1.0bn each (with likely commercialisation in Apr’25 and Aug’25). Factoring in 3QFY24 results and commentary, we have lowered our FY24E/FY25E/FY26E EBITDA and EPS estimates by ~1-2%. As a result, our Mar’25 TP is revised to INR 1,805 (from INR 1,830 earlier). We estimate that Clean will register 36% EPS CAGR over FY24E-26E. Any delay in new product approvals could be a downside risk to our estimates. We maintain BUY.

EBITDA miss on account of higher other expenses: Clean Science’s 3QFY24 consolidated gross profit was 2% ahead of JMFe at INR 1.3bn (up 9% QoQ while down 18% YoY) on account of higher-than-anticipated gross margin of 66.8% (vs. JMFe of 66.5% and 65.9% in 2QFY24) while revenue was largely in line at INR 1.9bn (up 8% QoQ while down 18% YoY). During the quarter, other expenses was lower at INR 319mn (vs. JMFe of INR 340mn and INR 326mn in 2QFY24). As a result, EBITDA came in 6% above JMFe at INR 866mn (up 16% QoQ while down 20% YoY) and PAT was 7% ahead of JMFe at INR 626mn (up 20% QoQ while down 25% YoY).

Unit 4 commercialisation in Feb’24; INR 2.3bn worth pharma intermediates’ capex on top of HALS: During the quarter, sequential revenue growth was on account of higher volumes. Moreover, despite higher contribution of newer products (~25% of overall sales) and domestic sales, the company was able to make better gross margin. For HALS 701, the company has received approvals from multinational company in the EU and has already started exporting to China and Korea. For 770, domestic acceptance is increasing. The company intends to take the run-rate of these products to ~200MT per month by end-FY25. Besides this, the company will be commercialising the remaining HALS series of products in Feb’24 under its subsidiary CFCL for which it has spent INR 3.35bn including the utilities. Further, the company intends to incur additional INR 2.3bn capex in FY25.

Estimates lowered marginally; maintain BUY: Factoring in lower margins for new products getting launched in 4QFY24 and higher depreciation in FY25/26 due to higher capex, we lower our FY24E/FY25E/FY26E EBITDA and EPS estimates by ~1-2%. As a result, we maintain BUY with a revised Mar’25 TP of INR 1,805 (from INR 1,830 earlier).

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