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Subdued quarter; growth outlook strong

Clean Science’s 2QFY25 earnings print was lower than our and consensus expectations. Reported EBITDA was ~7%/12% below JMFe and consensus on account of gross margin contraction and higher other expenses. The company didn’t pass on the increase in raw material prices to focus on volumes. As a result, sales growth was largely driven by volume growth with end product prices being steady. Going forward, the company will continue to focus on market share gain. We highlight that ramp-up of three new HALS products and new pharma intermediate will be key growth drivers in FY25. For FY26 and beyond, growth drivers are likely to be additional contribution from the pharma intermediate and contributions from two new performance chemicals. In our view, with expected EBITDA break-even of Unit-4 by end-FY25, we see positive operating leverage flowing through from FY26 onwards. Factoring in 2QFY25 results and management commentary, we have revised our estimates downwards by ~4%. We believe Clean has a decent runway for growth at least for the next 4-5 years. We expect 32% sales CAGR and 27% EBITDA/EPS CAGR over FY24-27E. In case there is a pick-up in product prices, there could be an upside risk to our estimates while any delay in new product approvals could be a downside risk to our estimates. We roll forward to Mar’26 TP (from Sep’25 TP earlier). We maintain BUY with a revised Mar’26 TP of INR 1,845 (based on 40x Mar’27E EPS).

* EBITDA miss on account of gross margin contraction and higher other expenses: Clean Science’s 2QFY25 consolidated gross profit came 1% below JMFe at INR 1.5bn (up 1%/25% QoQ/YoY) on account of lower-than-anticipated gross margin of 62.4% (vs. JMFe of 65.0% and 65.4% in 1QFY25) while revenue came 3% above JMFe (1% below consensus) at INR 2.4bn (up 6%/31% QoQ/YoY). During the quarter, other expenses were higher at INR 447mn (vs. JMFe of INR 400mn and INR 389mn in 1QFY25). As a result, EBITDA came in 7%/12% below JMFe/consensus at INR 897mn (down 5% QoQ while up 20% YoY). Further, on account of high depreciation charge and tax rate, PAT was 19% below JMFe/consensus at INR 587mn (down 11% QoQ while up 13% YoY).

* Subsidiary to achieve EBITDA breakeven by end FY25: During the quarter, large part of ~31% YoY sales growth was driven by volumes while prices were steady. During 2QFY25, performance chemicals sales stood at INR 1.6bn (same as JMFe of INR 1.6bn and up from INR 1.5bn in 1QFY25). Pharma and agro intermediates sales stood at INR 429mn (vs. JMFe of INR 420mn and INR 403mn in 1QFY25). FMCG chemicals sales stood at INR 310mn (vs. JMFe of INR 297mn and INR 291mn in 1QFY25). Going forward, the subsidiary CFCL, which is EBITDA-negative in 1HFY25, is expected to achieve EBITDA breakeven by end-FY25 with increase in utilisation of HALS and pharma intermediate.

* Expect 27% EPS CAGR over FY24-27E; maintain BUY: In the medium term, the company has indicated EBITDA margin of ~40+% for the parent and 25% for HALS in standalone entity. Factoring in 2QFY25 results and management commentary, we have lowered our FY25/26/27 EBITDA and EPS estimates by ~4%. We expect Clean to register 27% EPS CAGR over FY24-27E. We maintain BUY with a revised Mar’26 TP of INR 1,845 (from Sep’25 TP of INR 1,760 earlier) (based on 40x Mar’27E EPS).

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