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Volume growth across segments drives performance YoY

* CLEAN’s reported EBITDA in 1QFY25 was below our estimate at INR947m (+24% YoY), with a gross margin of 65.4% (vs. 61.4% in 1QFY24). EBITDAM expanded to 42.3% from 40.5% in 1QFY24. The revenue contribution of Performance Chemicals increased 2% YoY, while that of Pharma & Agro Intermediates declined 1% YoY. PAT grew 12% YoY to INR659m.

* There was strong YoY growth across segments, led by healthy volumes. Europe and China markets witnessed meaningful growth. The management highlighted that there was average 60-65% capacity utilization across segments, with 70% utilization for the Performance Chemical segment (excluding HALS). CFCL has commenced production of 3 HALS products, namely HALS 622, HALS 944 and HALS 783, with another product to start production in Aug’24.

* The company anticipates improved margins within a few quarters as it scales up and covers fixed costs. Lower raw material prices are boosting the parent company's performance currently. Sustainable demand and quarterly volume growth indicate potential for increasing future volumes. CLEAN is also setting up a 6MW solar plant to moderate its power bill and enhance its green footprint.

* CLEAN spent INR1b on CFCL in 1QFY25 and plans to commercialize a pharma intermediate by 3QFY25 with a capex of INR300m. It is constructing a production block for a performance chemical with a capex of INR1.5b, to be ready by 1HFY26. Another capex of INR1-1.5b would begin in Sep’24 for a water treatment chemical in the Performance segment.

* We have made some adjustments to the tax rate for FY25 since HALS would take time to ramp up and tax benefits would occur in FY26; we account for higher utilization for HALS and FMCG Chemicals in FY26. Subsequently, we cut our EPS estimate for FY25 by 9%, but we increase our revenue/ EBITDA/PAT estimates by 7%/7%/5% for FY26. We value the stock at 40x FY26E EPS to arrive at a TP of INR1,440.

Miss led by higher employee expenses and lower other income

* The company reported revenue of INR2.2b (+19% YoY). Gross margin stood at 65.4% (+400bp YoY). EBITDA margin was 42.3% (+180bp YoY).

* EBITDA came in at INR947m (est. INR1b), up 24% YoY. PAT stood at INR659m (est. INR813m), up 12% YoY.

* CLEAN has announced that it has commenced the construction of production block for the manufacturing of a performance segment product in its WOS. Total capex would be ~INR1.5b for the same.

Segmental and other highlights

* There was volume-led growth in 1QFY25 on YoY basis.

* Revenue from Pharma Chemicals was INR403m (+13% YoY), led by improved volume and realization. Revenue from Performance Chemicals was INR1.5b (+23% YoY), with growth across all products led by increase in volumes. Revenue from FMCG Chemicals was INR291m (+19% YoY), led by volume growth.

* Revenue from the domestic business accounted for 37% of total revenue, while the rest was contributed by exports. The share of China and Europe increased, while the share of Americas declined.

* CLEAN incurred a total capex of INR10b in 1QFY25, primarily in subsidiary Clean Fino Chem.

* Management has highlighted that it commercialized three additional products under HALS series i.e. HALS 622, HALS 944 and HALS 783 in Jul’24. A pharma intermediate product is expected to be commercialized during 3QFY25.

* The board has extended the employment of Mr. Krishnakumar Boob (WTD since Apr’21) until 31st Mar’26 (He will attain the age of 70 years on 31st May’25).

* The board has also approved the appointment of Mr. Parth Ashok Maheshwari as an Additional Director designated as WTD (he is one of the promoters and son of Mr. Ashok Boob, MD).

Valuation and view

* CLEAN is actively pursuing R&D and has entered the HALS series, which has an estimated global market size of USD1b. Commercial production from CFCL has commenced and the management expects HALS utilization to reach 80% in three years.  * The company is expected to generate INR2.9b in FCF during FY25-26, with a planned capex of INR4b for the same period. The company plans to finance this capex through internal accruals and is projected to maintain a net cash position in the future.  * The stock is currently trading at ~44x FY26E EPS of INR36.1 and ~33x FY26E EV/EBITDA. We value the stock at 40x FY26E EPS to arrive at our TP of INR1,440.

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