Clean Science and Technology’s (Clean Science) Q1FY23 performance was mixed. Revenue growth was strong at 60% YoY and it benefited from faster than expected ramp-up in newly launched products, viz. TBHQ and PBQ.

The company is already planning to expand its PBQ capacity 2x to 1ktpa in 3-4 months. It has a good track record of new product launches and scaling them up (this has been one of our investment theses for smart chemical companies). EBITDA margin continued to shrink and was at 39% vs >50% a few quarters back. Company believes the worst is behind and that softening raw material prices should help improve the margin. However, new product launches can be expected to keep pressure on margins until they mature.

Competitive intensity is likely to rise in the key products (MEHQ and guaiacol) as Vinati Organics has announced large capex in these products. Clean Science remains confident of defending its market share with support from its strong process and customer relationships.

EBITDA margin dipped to 39% (down 970bps YoY). In Q1FY23, Clean Science revenues grew 60% YoY (+14.4% QoQ) to Rs2.3bn. This was driven by 45% YoY (+10.1% QoQ) revenue growth to Rs1.5bn in performance chemicals segment, which benefited from capacity addition in MEHQ and guaiacol where capacity rose 50%. Clean Science also launched TBHQ with 1.2ktpa capacity and its utilisation was at 30-40% during the quarter

Pharmaceutical intermediates revenue jumped 142% YoY and benefited from faster ramp-up in the import-substitution product PBQ, a raw material for agrochemicals. Company plans to double its PBQ capacity to 1ktpa in 3-4 months. It also plans to launch a number of pharmaceutical and agrochemical intermediate products. FMCG revenue grew 43% YoY (fell 6.1% QoQ) to Rs230mn during the quarter.

EBITDA margin dipped to 39% (down 970bps YoY). Clean Science’s gross profit margin dipped by 420bps QoQ (10.2%ps YoY) to 61%, yet gross profit rose 37% YoY to Rs1.4bn on strong revenue growth. Employee cost and other expenses were up 28.5% and 66% YoY respectively. EBITDA was up 28% YoY to Rs913mn and EBITDA margin contracted 970bps YoY to 39%. Net profit grew 15.2% YoY to Rs629mn and was further hurt from lower other income of Rs18mn on high forex losses. Company believes margins will improve sequentially on softening raw material prices (particularly phenol). It has certain contracts tied up to meet its requirements and as protection from rising prices. It expects the benefit of reduced raw material prices on margins to reflect from Q3FY23.

New products and competition. Product launch pipeline is strong and will keep margins down as new products have lower margins (vs company average) at the time of launch (and improve as product matures). Clean Science’s immediate launch is in the large product category of HALS, which finds application as stabiliser and agrochemical intermediates. Its opportunities lie as an import substitute and exporter. The larger supplier, BASF, has recently taken price increase to pass on inflation, and this is good for Clean Science.

The company is aware of new competition entering its key products of MEHQ and guaiacol, but remains focused on improving its already strong manufacturing process and strengthening its customer relationships. It has stood with customers during challenging times of inflation, and taken hit on its own margins to establish itself as a preferred partner. Further, the company enjoys a lead in understanding technology, and has sharpened its processes over the years, which will remain a competitive advantage.

Other highlights: 1) TBHQ for which the company commissioned its plant with 1.2ktpa capacity saw utilisation of 30-40%, and this should ramp up with rising customer audit and offtakes. 2) PBQ capacity is planned to double to 1ktpa in 3-4 months, which will help drive growth in pharmaceutical intermediate segment. 3) MEHQ and guaiacol capacity expanded by 50% in Q1FY23 in unit-3, and is running at 50-60% utilisation. Market share in MEHQ has increased from 50-52% to 60-65% currently. 4) Contract revenue accounts for 25-30% of the company’s total revenue. 5) HALS is the major project and management expects to operationalise the plant by Dec’22. 6) Company is planning to expand its R&D team by 20 scientists.