Clean Science and Technology Limited (CLEAN) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q2 FY '25 Earnings Conference Call of Clean Science and Technology Limited. We have with us on the call Mr. Siddharth Sikchi, Executive Director and Promoter; Mr. Sanjay Parnerkar, CFO; and Mr. Pratik Bora, Vice President. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Siddharth Sikchi for opening remarks. Thank you, and over to you, sir.

Thank you so much. Good evening, everyone. I wish you all a joyous Diwali and a prospering new year. I'm happy to connect with all of you to discuss the performance of our company for quarter 2 of FY '25. The business environment continues to be encouraging. Our quarterly business performance has been a reflection of encouraging business environment. Coming to the financial highlights. Starting with the quarter-on-quarter comparison. On a sequential basis, the revenue was steady. Domestic and international sales mix was 30% and 70%, respectively. EBITDA remained steady at INR 95 crores, while EBITDA margins continue to be strong at 42%. A comparison on Y-o-Y basis, sales improved by 26%. And this improvement in sales is primarily volume mix. Improved sales led to strong EBITDA growth of 25% during the quarter. Consequently, the company reported 30% growth impact for the current quarter. As the subsidiary operations scale up, the consolidated profitability is expected to improve. We are on track to launch the Pharma intermediary during quarter 3 and look forward to volume scale-up in the high series. A little bit about the sales profile. The revenue contribution from Performance, Pharma & Agro and FMCG Chemicals were 69%, 18% and 14%, respectively. Performance segment witnessed strong growth amongst all segments led by increased volumes. Pharma and FMCG segments witnessed similar growth, which was volume-led. For the quarter, highest monthly sales volume sale to [ 135 tonnes ] a month basis. A little on CapEx update. We have incurred a CapEx of INR 155 crores during H1 FY '25, which was primarily towards investments in the subsidiary. We are pleased to announce announcement of construction activity for another Performance Chemicals segment, which is expected to commercialize by H2 FY '26. FMCG, we are pleased to announce the company has secured a responsible care certification for 3 years. The recognition underscores our commitment to safety, health and environmental management. On the outlook, we are optimistic on the growth going forward, led by launch of Pharma entering Egypt, scale-up of our new products under the HALS series and commercialization of Performance segment products. Thank you so much.

[Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.

Happy Diwali. I got a few of them. First, you said that entire growth, what we have seen both in Performance and Pharma intermediate segment has largely come through volumes, which is very impressive, 30% plus, right? What current utilization are we running our plant right now in both this segment? And do you anticipate more capacity addition in the coming quarters?

Currently, we are running at 70% capacity utilization in totality. And right now, we have more bandwidth. So right now, we are not looking for expanding on initiatives.

Siddharth, can you break this between the legacy and HALS because HALS is something which is a newer product?

No, I'm not talking about HALS at all. I was only talking about Clean Science [ company ]. I mean as it is an absolutely different volume because the capacities are far larger, and we are probably at 10%, 15% capacity utilization. So the ramp-up has to happen.

So what we are telling is that even in the [ premier ] HQ, DHA and all those GCC and all those our existing products, there, we are running only 70%. So we have a good headroom for growth. So there is no immediate need for capacity addition there, right?

No, we have it. I mean right now, it's not needed. I mean we have debottleneck at various points. So now we are good for some more time.

That's very clear. Second, on the -- again, the parent business, which is the legacy business. The quarter-on-quarter, I see the mix of the business remains steady. Pricing also, you're telling us has been very stable. Any particular reason why there is a 250 bps quarter-on-quarter dip in the gross profit margin?

So, now, Sanjesh, what is happening is the -- see the raw material prices have increased over the past few months, due to the war scenarios. I mean the Israel, Iran thing and all that. So however, we have not been able to increase or pass the price increase right now to the customer. We are right now focusing on getting the volumes back compared to last year. That is one. Second, our product mix is also changing. I mean the principal products are reducing in newer products like the Pharma Intermediate, the TBHQ. So those products are now increasing the basket. And hence, there is a little compression in the margins.

Okay. But on a like-to-like basis, TBHQ and BHA, it won't be so much, right? I can understand raw materials...

Not so much, not so much.

Not to an extent of 250 basis points?

Not that -- it's not there.

Got it. Got it. And do we intend to pass on the raw material pressure or we will now focus on market share gain?

Right now, I think for the next quarter, I think I would like to focus on getting the volumes back, getting the business back on track because now I think the volumes have come back. And I think it's better not to increase the price, and we can see some competition might come up globally, somehow, if there is. So right now, our focus is to remain -- to have the same stickiness of the customer but get volumes as much as we can.

Got it. Got it. And was there any particular activity in America? The revenue sequentially doubled.

See, now our HALS segment, the water treatment chemicals, those markets have opened up from the U.S., that is one. Plus general -- I mean, some -- I mean, because of the last year slowdown, some of our customers of Performance Chemicals, which were not listing materials, have now resumed that. And so that -- those volumes have also now come back to the business.

So, this is sustainable, right?

Yes, yes.

This is absolute revenue question. I can understand growth, but absolutely sustainable, right?

Absolutely. It will also be sustainable.

Got it. Got it. Then the next thing on the HALS side of it, we were 3 products, 701, 770, 119, and we expected to launch 944 and 292. Where are we in that?

So let me go back. 701 launched, selling no problem, 770 [ tank ] kit. Now there are 3 products, which is 622, 944, 119. 622, 944 and 119.

And 770?

All 3 are done. All 3 are now successfully launched. Now we have started receiving approval from the customers. And shortly -- I mean, the sales have also begun. And now I think, hopefully, quarter-on-quarter, the sales and the volumes should start picking up, which we will start seeing.

Got it. Got it. This 622 was the water treatment one, right, you spoke about?

No, no, no. 701 was water treatment.

Okay. 701 was water treatment. That's what picked up in U.S.

Yes, that's also picked up in U.S.

Got it. Got it. The next on the CapEx, you said that the [ INR 30 crore ] pharma should be up and running next quarter -- this quarter, right? Q3?

By 15th November -- 15th to 25th November, which we expect to start putting raw materials in the system.

And this is what, domestic or largely exports?

Majorly domestic. China substitute.

So it is an import substitution?

Yes, China import substitution, right.

Got it. Got it. And we have all the approvals in hand, right? So because it's a relatively smaller capacity, so ramp-up should be faster?

There is no approval because pharma does not want approval from your lab or pilot. They need commercial product for approval. I mean those are very standard practice. But we expect the validation and approval we should get between 1 month to 5 months to 3 months depending on customer to customer. But while the ramp-up happens -- I mean once the approval happens and we start supply, I think the ramp-up should be pretty much easy because the building is ready. We just have to add equipment and that is the capacity.

And how much India imported materials are annually?

Right now, our capacity is 50% of Indian imports.

50% of Indian import. And we are competitive on pricing?

That is the whole reason to put up the plant.

Yes, yes. I'm just confirming. I can completely get that, just reconfirming that.

Of course, I mean, tomorrow's China reduces the price by 50%, then we don't know. But on current basis, I mean, what we have been tracking for the last 3 years, we should be able to catch up, no issue at all.

No issue, at all. And you said that one more product we are launching in second half of '26, that's INR 150 crores of CapEx, what we announced, right?

Yes. So that should start by June, July starts.

June, July of '25?

Of '25.

Got it. And this will be for what application?

Variety of applications, I mean it's quite a versatile product. So it is like a stabilizer, [ using as ] a Performance chemical. So it's for a lot of applications.

The next question is from the line of Priyank Chheda from Vallum Capital.

Congratulations for -- on a fantastic performance on volumes. Again, coming back to gross margins. So if the HALS mix further going up. It is not expected that gross margin mix will slightly deteriorate as well as EBITDA margin mix of slightly little bit. Now when we, again, prioritize volumes, should you think that this would further go down as HALS further ramp-up in the mix?

Sorry, I think there was a -- hello?

Hello. Yes, we can hear you, Siddharth. Priyank, we were not able to follow your question. If you can speak -- I mean, I think there is some disturbance in the line. You have to little slowly for us to catch it.

Am I audible right now?

Yes, you are. And focus on one question at a time.

Perfect. Perfect. The question is on the gross margins, with the HALS mix going up, it was expected that gross margins will slightly deteriorate on the lower side. Now when we are focusing -- yes. And now when we are focusing on volumes...

On consolidated levels.

Correct, correct. On consolidated level. And now that we are prioritizing volumes and we're not able to pass on slight price increases of the raw material, should we think and should we consider that this gross margin deterioration will be -- will further accelerate versus what we were thinking earlier?

No, no, no. It is not like that. So the margin and -- sorry, the price increase, I was more or less talking about the parent company products. That is point number one. Point number two, which is has volume pickup, as it pick up, our overall process becomes more and more robust because the plants are -- when a chemical plant is designed, these are continuous processes, right? So running a plant at 10% and 15% capacity utilization is not a very optimum level of capacity utilization. So as and when our capacity utilization increases, our gross margins will start improving also given the fact that our yields efficiencies will further start increasing or improving. So this will all account by increasing the gross margin. And of course, when we go to the fixed cost, because this is a very large facility, the fixed costs are relatively high. So when the volumes pick up happen, the fixed cost distribution across, the [ fuel ] basis will further improve dramatically and should start contributing more to the margin levels.

Got it. That is clear. On the regional mix, China, we have seen Y-o-Y for the first half going up by 38%. Now -- and as well as in Europe, we have seen a 34% jump. What should be the end market that we should -- end products -- end-consumer products that we should think when it comes to China, Europe? And also, is there a seasonality in India with respect to the September quarter, particularly?

No, no, no. There is no seasonability in our businesses. It is just that, I mean, the demand which you see the last year was a real washout. So these were expected demand -- these were the demand already in place earlier, of course. I mean, there is a small increase of 5% to 7%. And I think that is what has come back now in the system. So these are sustainable -- I mean, volumes.

Got it. And any particular percent in the end consumer market in China that we should think? Any particular end consumer market that we should ...

Acrylic acid producers.

Sorry?

Acrylic acid producers.

Got it. Perfect. And on the CapEx side, you did mention about a product of a product -- another product of Performance Chemicals. I think that stabilizes where we are doing the CapEx of INR 150 crores. You did not touch upon another product around the water treatment, which we have also been doing in the subsidiary company. Anything on that?

That has -- that will also begin, probably, in the next 2 to 3 weeks, we'll start the construction, and we expect that plan to commercialize by December -- December calendar '25.

And that's also INR 150 crores of CapEx. So now we are doing a [ 250 ] -- 2 products. One is Performance Chemicals with INR 150 crores and one is water treatment product with another INR 150 crores?

Total CapEx, INR 300 crores.

Perfect. In the same complex of the subsidiary, we have further room to expand. Now anything from your R&D labs, any breakthrough that we have got to about in terms of further expansion into new products in that line?

There are a few, but let them crystallize and let us -- if we decide to go on commercial scale, we will make the announcement.

Perfect. Now last question on the stand-alone utilization, the standalone business -- apparent business ex of HALS, where we are at 70%. And we have -- we know the key plug-in that we need to do with respect to one that we know is P-BQ, where we had to do some product rectifications. Where are we on that? And the second one is TBHQ...

One question at a time, Priyank, because it is short -- your voice, we are not clear. So P-BQ, we have restarted the plant, okay? We have restarted after our successful pilot trial, and we have submitted the samples to some of the customers. Let us get a feedback and then we will know -- I mean, has there been a process or product improvement in terms of application at the customer then. So we will know the results probably in the next 2 weeks' time.

And on TBHQ, where we were somewhere around 50%, 60% utilization?

No, that has gone up to 70% now.

Okay. So P-BQ and TBHQ are the key plug-ins to be done in terms of stand-alone utilization going up?

No, TBHQ did quite well quarter 2 as well. So that is why our utilization of parent product came down. So TBHQ is more or less settled, as P-BQ is the one, which we have to work on now.

Any other product in the parent where we need to work it on to -- for utilization to go up? Or is it a proper demand, which will drive the utilizations going up?

Right now, I think we are good. In case we see any demand coming up in any of these products, then I think the next stage will be to set up another facility for that.

The next question is from the line of Ankur Periwal from Axis Capital.

Just on -- while you did mention volume-led growth across Performance and FMCG and Pharma. Any Q-on-Q further decline in pricing or we are largely stable there across Performance as well as HALS?

Absolute stable now.

Sure. So -- and the comment that you earlier made in terms of focusing on market share gains, with the RM prices coming down now, is there any price cuts taken by competition? Or they are probably still holding on to the earlier pricing and hence, more market for us to gain?

Holding. Yes, we are holding at the same price now. And there is no real lowering of price. I mean, we are still in that range, plus/minus 3%, 4%. So sometimes it goes up, some news, again, it goes back. So it's more or less we are in the range. I mean I would not say there has been tremendous reduction in raw material prices.

Sure. Just curious, given that we have been consistently gaining volume-led market share here, any price tactic or any strategy being played by the competition? Or it's tough given the market environment?

Very tough given the market environment.

Okay. Fair enough. On the HALS side, we have seen -- last quarter, we were at 125 tonnes-odd, this quarter, we are at 135 tonnes. So gradual uptick there. This uptick is largely led by higher growth in the existing products that we had launched, 770 and 701 or the newer ones wherein we were waiting for the -- okay. So the newer ones which -- for which we were waiting for product approvals from global customers, when is the progress there?

So you will see that the first time -- I mean, of course, the material has been shipped to Europe, they have been shipped to the U.S. Now the customer base is increasing as we are moving forward. Fortunately, the next line of product, which completes the entire basket is also now fully commercialized, approved. So now I personally feel that going on, going forward, the ramp-up should increase with existing as well as new customers. Plus, we are at a point where we are started appointing distributors globally in South America and United States, in Europe. So that also -- the reach is also increasing as we move on.

Yes, that was the next question. So from a distribution point of view, we are there across the globe. So there are no building blocks there? That is already in place?

That is already in place.

So the only thing which you are waiting for is the approval for the newer as well as existing products, which are largely 5 now? Or have we started focusing on the blends as well?

No. So basically, what is happening is we are also making one blend already, which is called 783. And if needed, we can make other blends. But so far, we have not received any other interest in any other blend. So 783 is a more prominent blend. So blend is not a very complex operation. It just means mixing up to materialize an appropriate percentage.

Okay. Sure. And just last bit on the bookkeeping question. So this quarter, our tax rate had increased versus 25%, 26% earlier. Is it a one-off? Or should we read something into it?

It is only one-off, but there is no major increase in the tax rate. It is largely because of the other gains where the tax rate is a little more. The change in -- fundamentally, the change has happened because of the final budget where they have changed the rate for capital gain tax.

The next question is from the line of Arun Prasath from Avendus Spark.

My first question is on the -- our traditional Performance Chemicals business like [ the BHA ] and DHA. You said on the -- you said on a Y-o-Y basis, it's primarily volume-led growth. On a sequential basis, also is it a volume-led growth?

Yes. Yes. On a sequential basis, also it is volume-led growth.

Okay. Because I'm just wondering because in Q2, now price sequentially went up by 7, 8 percentage, but -- which means that we have not increased rates in [ MEHQ ] and BHA and other traditional products? We are not able to...

It was a very -- I mean the price is shorter because of the current news about the war between Iran and Israel. But within a week or 2, the prices again subsided down. So it is -- we are not in this one-off opportunist where we can increase the price so quickly.

Okay. So as of now, our price -- our procurement price is more or less come back to the normal in terms of amount?

Yes.

Okay. And earlier also said that you are going after the volume instead of margin. This is to the MEHQ and BHA or the other traditional Performance products?

I was speaking more or less about our parent products, about the parent business where we are trying to gain those additional market share. In terms of HALS -- I mean, in terms of other Performance Chemical like per se HALS, and we are anyways too little in the market. So we have to only keep adding and growing the market share.

I mean just to correct, we are not going for volumes over margin. We are conscious of not going for further margin dilution. Like we are conscious of ensuring EBITDA margins of 40% plus.

Great. Okay. Okay. So which means is there any capacity additions in our traditional basket of products outside India? Because you said there is an increase in competition, and hence we are not able to increase -- pass on the prices immediately.

Sorry, go again.

Is there any capacity addition outside India from your competition, where they are also placing huge volume in the market?

No. I mean, right now, there is no competition addition. Of course, the conventional route is always available for anybody to make the products which we are making. So we have to be conscious of the fact that we have to place our pricing in a manner that the customer is -- or that the competitor is not incentivized to add or move -- or add more capacity than go to the customers.

Okay. The spread between the MEHQ and the TBHQ, is it still negative, right? So we should still have some room to increase in MEHQ to gain this a decrease?

No, we will look at increasing probably post the December period, once we understand how the market is shaping up. So probably, we might look at it or we look at it going forward in quarter 4.

Okay. Alriht. Siddharth, can you also approximately, what is our current market share in MEHQ? And what is our capacity share in MEHQ global?

In MEHQ, we think our market share would be 55% to 60%.

And on a capacity basis?

On capacity basis.

Okay. On capacity is 60% [ MEHQ ]. Okay. And that means the actual volume share would be lower?

So the mean market share on the production basis, MEHQ could be a little lower because MEHQ also actively continued for BHA.

Okay. And anything you're hearing from your competition on adding MEHQ capacity on this alternate or there is any [ sort ], apart from outside India anywhere you're hearing about that?

No, not at the moment that we are aware of.

Okay. So we think largely this margin reduction in this quarter in the parent business looks like very temporary thing? [ Is it outside the system ]?

Right.

And any reason why in parent business, power and fuel cost is disproportionately higher in this quarter as compared to previous quarters?

In this quarter, it has gone up from 8.7% to 9.6%, primarily led by increased production activity, some impact of monsoon where we got lower net [ of our credit ]. And the third is also little bit alteration in the product mix, which are adverse impact on the power [ and fuel ]. That is from that narrow band of 8.5% to 9.5%.

Okay. Because what I'm seeing is sequentially power and fuel increased to 15 percentage, whereas our volumes probably increased by around 6 to 7 percentage. That's why I was wondering if there onetime, one-off impact in the [indiscernible]

There was a slight increase in the coal pricing also.