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Pressure on margin continues to hurt performance

* Clean Science (CLEAN)’s reported EBITDA in 2QFY25 was below our estimate at INR897m (+20% YoY), with a gross margin of 62.4% (vs. 65.9% in 2QFY24). EBITDAM contracted to 37.7% from 41.3% in 2QFY24. Revenue contribution of Performance Chemicals increased 2% YoY in 2QFY25, while that of Pharma & Agro Intermediates declined 1% YoY. PAT increased 13% YoY to INR587m.

* A strong YoY growth was observed across various segments, fueled by higher volumes, with the markets in the Americas and China witnessing meaningful expansion. Absolute revenue doubled in the Americas on a sequential basis as commissioning of HALS701 opened up the market for water treatment chemicals. Management highlighted that there was on average 70% capacity utilization for the standalone business, while the utilization for the HALS segment was very low due to the recent commissioning of the plant.

* CFCL has commenced production of three HALS products, namely, HALS622, HALS944, and HALS119. Management expects volumes to pick up in the next couple of quarters. At peak utilization, the HALS product segment is expected to generate a margin of 25%. Management highlighted that its focus would be on volume growth in 3QFY25 and also to capture higher market share in the legacy products while striving for improved margin.

* CLEAN expended INR1.6b in CFCL in 1HFY25 and plans to commercialize the pharma intermediate product in Nov’24. The peak revenue guidance stands at INR800-900m with a capex of INR300m. It is constructing a production block for a performance chemical with a capex of INR1.5b and peak revenue of INR3.5b. This will be ready by 1HFY26. Construction of a new water treatment chemical is likely to start in the next two weeks and will be commissioned by Dec’25. Capex stands at INR1.5b with an asset turn of ~2x.

* Due to the company’s underperformance in 2QFY25, we cut our FY25 EBITDA/ PAT estimates by 6%/8%, while maintaining our estimates for FY26. We account for commissioning of the aforementioned new capex and accordingly raise our revenue/EBITDA/PAT estimates by 6% each for FY27. The stock is currently trading at ~41x FY26E EPS of INR36 and ~31x FY26E EV/EBITDA. We value the stock at 35x Sep’26E EPS to arrive at our TP of INR1,430. Reiterate Neutral.

A miss on estimates due to higher-than-expected RM and employee costs

* CLEAN reported revenue of INR2.4b (+31% YoY). Gross margin stood at 62.4% (-350bp YoY). EBITDA margin was 37.7% (-370bp YoY) during the quarter.

* EBITDA was INR897m (our est. of INR1.1b, +20% YoY), with PAT of INR587m (our est. of INR776m, +13% YoY).

*  For 1HFY25, revenue was INR4.6b (+25% YoY), EBITDA was INR1.8b (+22% YoY), and PAT was INR1.2b (+12% YoY). EBITDAM came in at 39.9% (-100bp YoY). The implied 2HFY25 revenue/EBITDA/PAT growth is 14%/5%/1% YoY.

Segmental and other highlights

* Volume grew YoY in 2QFY25. CLEAN incurred a total capex of INR550m in 2QFY25, primarily in its subsidiary, Clean Fino Chem.

* Revenue from Pharma Chemicals was INR429m (+25% YoY); the growth was led by volumes.

* Revenue from Performance Chemicals stood at INR1.6b (+35% YoY); the growth was fueled by higher volumes and growth across segments. HALS’ sales volumes and product mix have been improving.

* Revenue from FMCG Chemicals was INR356m (+31% YoY), led by volumes.

* Revenue from the domestic business stood at 31%, while the rest was exports.

Valuation and view

* CLEAN is actively pursuing R&D activities and has entered the HALS series, which has an estimated global market size of USD1b. While the commercial production from CFCL has commenced, the management expects HALS utilization to reach 80% in three years.

* The company is expected to generate INR5.6b in FCF during FY25-27, with a planned capex of INR5.9b over the same period. The stock is currently trading at ~41x FY26E EPS of INR36 and ~31x FY26E EV/EBITDA. We value the stock at 35x Sep’26E EPS to arrive at our TP of INR1,430. Reiterate Neutral.

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