Clean Science Q2 Results Review - Challenges Continue To Outweigh Benefits: Motilal Oswal

Motilal Oswal Report

Clean Science and Technology Ltd. missed our Q2 FY24 Ebitda estimate, with a gross margin of 65.9% (versus expected 59.2%). Ebitdam expanded to 41.3% (versus 39.4% in Q2 FY23) with moderation in raw material prices and improved profitability from newer products. Fmcg chemicals grew QoQ in Q2 FY24, while performance chemicals and pharma and agro intermediates declined.

Management highlighted that the over production in China led to aggressive price of products, which hurt realizations of Clean Science in Q2.

De-stocking continued in Q2 as demand in the U.S. was unusually low. Improved sales volumes were offset by declining prices as the overall market was a buyers’ market rather than a sellers’ market. 

Management highlighted that sales from non-flagship products contributed 25% of overall revenues and expects it to be at a higher number with no capacity enhancements being implemented currently in the flagship products.

Tertiary butyl hydroquinone and Dicyclohexylcarbodiimide sales were higher with Guaiacol sales lower because of ongoing issues in the cough syrup market.

Clean Science announced a capex of Rs 300 million (out of the Rs 2 billion) dedicated to a pharma intermediate molecule. This single product will have dedicated production line and is expected to generate Rs 1 billion in revenue, primarily catering to the Indian market (to come online in the next nine months). Hindered amine lights stabilisers expansion in Clean Science is ongoing and on track to be commissioned by March- 24 (earlier guidance of December-23), but would take two-three years to reach optimal utilisation level.

We anticipate continued weakness in performance of the company in the coming quarters.

Consequently, we have revised down our revenue/Ebitda/ profit after tax estimate by -11%/-10%/-10% for FY24.

Clean Science is currently trading at 46 times FY25E with earning per share of Rs 29.8 and 33 times FY25E enterprise value/Ebitda.

Our target price is Rs 1,340, based on 45 times FY25E EPS. We reiterate our 'Neutral' rating on the stock.

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