Clean Science and Technology Limited (CLEAN) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q2 FY '27 Earnings Conference Call of Clean Science and Technology Limited. We have with us on the call Mr. Siddharth Sikchi, Managing Director and Promoter; Mr. Sanjay Parnerkar, CFO; and Mr. Pratik Bora, President, Commercial. [Operator Instructions] 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 afternoon, all of you, for taking time out to listen to our earnings call on a Saturday. So let me present to you the Q2 FY '27 earnings. So let me first speak about the basic -- the business performance. The quarter marked yet another consequent quarter of being the highest ever revenue in the history of the company, highlighting our continued effort to translate from investment phase to asset monetization phase in the new [ HALS ] segment, wherein base business, we continue to increase our volumes in our flagship products, detecting a robust cost competitiveness. On the base business of Clean Science, the base business saw a resilient volume-led growth across Performance and Pharma segment. Export sales increased to 73% of the stand-alone business against 64% during the previous quarter. Otherwise, the base business showed a steady performance. On the HALS segment, on a Y-o-Y basis, the HALS segment grew 2x in revenue during the quarter. It was achieved on back of robust and volume growth. To give a little perspective, in H1 FY '27, we achieved aggregated volumes of 67% of the total volumes achieved during the entire previous financial year. This growth means more to us than just numbers show. It reflects a fundamental shift in how our customers see us. We started as a new entrant providing our quality. And today, we are one of the trusted strategic partner with the customer. This trust is very difficult to win, and we are very proud to have earned this. Further, as we speak, we continue to add new customers and increase the wallet share from existing customers every quarter. On cost improvement fronts during the quarter and also in the subsequent quarters, we will be starting some of the key starting materials for some of these HALS product, which eventually will result in improvement in our gross margin. Put altogether, healthy volumes, continuous process improvements and benefits of operational leverage have resulted in EBITDA margin of 12% in the first half of FY '27. And during this quarter, we reached a PAT positive. CFCL has conducted and completed trial for the advanced grade of HALS product. This marks significant milestone towards the commercial launch of the new product expected to commence in H2 of FY '27. Turning on the input cost. Input costs have remained high during the quarter as the Middle East prices constantly kept the crude linkage stock prices high. Key raw materials such as phenol, acetone and methanol were 50% to 100% higher year-on-year, alongside an increase in coal and freight costs. With Chinese prices yet to move up, the pass-through to the customers was difficult. Consequently, the raw material cost rose to 43% versus 39.7% on a consolidated basis. However, the customer demand remained resilient. Now let me touch upon the financial performance of the period, 30th September '26 stand-alone. Starting with Q-on-Q comparison. On a sequential basis, revenues improved by 11% to INR 226 crores, largely due to higher volume across Performance, Pharma and FMCG. EBITDA and PAT margins are at 36% and 24%, translating into EBITDA of INR 82 crores and PAT of INR 55 crores. Margin moderation was primarily due to high raw material costs, which rose to 41% from 35% in Q1 FY '27. On Y-on-Y comparison, sales grew by 10% during the quarter, thus the revenue growth was primarily led by improved realization, while volumes were broadly stable. The demand environment continues to be steady. On [ control ] basis, company delivered a healthy volume net growth of 12%, resulting in revenues of INR 295 crores on a consolidated basis, with EBITDA and PAT margins of INR 92 crores and INR 56 crores, respectively. On Y-o-Y comparison, the sales grew 23% during the quarter. The revenue growth was primarily led by improved volume growth, approximately 10%, and realization by 13%. The increase in revenue is primarily led by consistent sales of HALS business, and consolidated EBITDA grew by 6%, supported by turnaround in CFCL. On a year-to-date basis, consolidated sales grew by 17% to INR 559 crores, with EBITDA of INR 188 crores and PAT of INR 129 crores. The split was 77% Performance, 14% Pharma intermediates, and FMCG was 7%. A little on the CapEx. Performance Chemical 2 will get commercialized by quarter 3 to quarter 4 FY '27. During the quarter, capital infusion in subsidiary was approximately INR 50 crores and INR 150 crores in H1 FY '27. With this, the total investment in subsidiary company stands at INR 900 crores. With this, I conclude my opening remarks and take this opportunity to also wish you all a very happy Diwali, and looking forward to the Q&A session. Thank you.

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

Siddharth, a couple of questions from my side. First, purely on the margin, just to clarify, the percentage margin in this quarter doesn't make sense, right? There is a very sharp inflation in the raw material, which mathematically compresses the margin. We are holding on to the existing run rate of 92%. That means we have retained EBITDA per kg despite all the headwinds and inflation. Will that be a fair statement to make?

Sanjesh, I think, see, we were not able to pass through the price increase to the customer. So of course, the percentage-wise came down, but on absolute because of the volume growth, we were still able to maintain the absolute number.

So what was the volume growth for this quarter?

Sequentially, the entire growth was volume led. And annually, the growth largely is realization led. So what Siddharth is also trying to arrive this at is that during this quarter, the entire raw material cost increase on account of the inflationary pressure was not translated to the sales growth. Sequentially, the sales growth is largely volume-led. And hence, the margins have taken that impact.

So we are -- this is purely on the stand-alone business we are discussing, right?

Yes. Yes, stand-alone basis.

So you're telling that this 12.5% growth is entirely the volume led in the stand-alone business? And what is the anticipated price hike required for us to retain that EBITDA per kg kind of a run rate?

So we'll have to really calculate the cost. Yes, actually, the point is it's market driven, and the prices in China have not risen to the point that we can pass any benefit -- any cost increase to the customer. Apparently, the commodity prices which we see in China are far lower than the prices which we are buying in India.

You mean phenol, acetone prices, the differential are...

Yes, at least 10%, 15%, the prices are lower in China.

Okay. No, no, I got the point. I got. But how is the economics between HQ route and the [ anisole ] route because we thought Chinese are largely on an HQ route, which they were disadvantaged some point of time. This phenol, acetone difference is making all that -- we are now competitively at a stage that Chinese are holding up on the price increase for us?

So basically, the reason is, I think -- see the crude oil prices, I mean, the phenol spread, if China price of phenol is about [ 1,300 ], whereas India prices of phenol is over [ 1,550 ], so that delta is big enough delta that they are not increasing the prices. They are holding on to all the prices, be it hydroquinone, be it any HQ. And hence, we have to also maintain the prices and absorb all these raw material prices ourselves to keep the market share in China or in other parts of the world.

No, I'm very clear. Super clear, Siddharth. Second, on the new product, HQ, which we started now a quarter back. We said this quarter, we will do commercial. Where are we there in terms of Performance Product 1?

So in hydroquinone, catechol, Sanjesh, right now, we are at about 30%, 35% capacity utilization. [ And fortunately ], all these capacities are currently used for our own captive consumption. And small sales have picked up in Europe, and I think some -- and also something in India.

Got it. My next question on the HALS, Siddharth, good to see volume picking up very sharply for us. You also mentioned in your opening remarks that we are looking at more backward integrating or some of our backward integration projects are in the process of getting commissioned. What are these products? And is this for the contract we have done with the [ Genesis ] or this is a different...

No, no, no. See, some base products which we manufacture. To make it more cost effective, we have identified some of the intermediates. If we are able to make it in-house, it further improves our cost competitiveness in these products. So we have already started one1 product where we have put our [ ethoxylation ] facility. So that product is started, which is a precursor for one of the HALS. And in the next quarter, we will be starting another intermediary, which we were currently buying from China, which we will be making in-house to make these HALS more cost effective.

Okay. These are solvents or the building blocks we are talking about, Siddharth?

No, no, no. These are building blocks. These are raw material. They're [ not ] solvents.

Got it. Got it. And you mentioned that we have successfully tested the products for the contract. When should we start seeing them flowing into revenue? Will it be more like FY '28 or something -- next quarter -- this quarter, running quarter?

Yes, November or December, we'll start shipping this material to Europe.

Got it. Got it. One last from my side, Siddharth, before I get back into the queue. We were expecting to produce barbituric acid. I haven't heard about that for a while now. Any update you want to share there?

See, basically, we realized that currently, the prices the Chinese are offering, we are not able to offer those prices. So we have kept this product on hold for the moment.

Okay. Okay. We haven't proceeded. We didn't make any changes in the plant we were planning to, right?

No, no. We did that, but we want -- because the major raw material is imported from China, but the Chinese producers are not able to -- are not increasing the prices, but the other raw materials, which you are buying from India, have become almost 3x. So it is not making any sense for us to produce at the moment.

Got it. Got it. And then post this Performance 2 which we are very close to commissioning, what does the product pipeline looks like for FY '28 and '29?

So I think we are very bullish on this whole light stabilizer segment. So we are going to debottleneck, and we are going to add increased capacities in some of these products, and also trying to get in allied or adjacencies, which will be catering to the same customers. So you will see all these products coming up in the next few quarters.

No, I missed which product? Life -- sorry, sorry, I missed the product.

Light stabilizer adjacencies. [ Healthcare ] adjacencies. It's something which we will start producing in the next few quarters.

Okay. Okay. Nothing in the performance segment apart from the HALS adjacency right now we are looking at, right?

Right now, no, not at the moment.

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

Siddharth, I understood why we have not able to take the price hike. But my question is what will push us and which will eventually make us take the price, like what is the breaking point? What should we monitor from our side, which will indicate that we will be taking the price hike?

See, we are continuously trying to increase the prices. When we get a severe pushback, we know the prices are where they are currently. And our point is very simple. We don't want to lose our market share because gaining these market share again becomes a big problem. So by retaining the market share, if we are able to increase the price, we are more than happy to do so.

Right. But for that, the demand of the core products should be higher than the discretionary capacity of the Chinese. Do you see that gap narrowing on any point of time? Because given the current phenol, acetone trends, it doesn't look like the prices is going to correct unless crude takes a major [ dip ].

No. But I think -- see, eventually, even the Chinese or even the competition has to raise price at some point in time. I mean, -- but it depends on when are they raising because I don't want to be the first one to raise and lose market share.

Got it. Understood. And second, on HALS, you said that eventually, we'll be allocating more of our capital into these. In terms of -- so -- in terms of product portfolio, anything else we are missing before we're getting into the venturing to the same debottlenecking of the existing products?