CLEANNSEQ2 FY24November 02, 2023

Clean Science and Technology Limited

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127turns

11analyst exchanges

3executives

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Management on call

Siddharth Sikchi

EXECUTIVE DIRECTOR, CLEAN SCIENCE AND TECHNOLOGY LIMITED

Sanjay Parnerkar

CFO, CLEAN SCIENCE AND TECHNOLOGY LIMITED

Pratik Bora

VICE PRESIDENT, CLEAN SCIENCE AND TECHNOLOGY LIMITED

Key numbers — 40 extracted

ecovery in demand. On financial highlights Quarter-on-quarter comparison: On Q-o-Q basis, the 4% decline in revenue was led by drop in realization across the key products. In fact, improved sale

25%

limited the decline in revenue. The contribution of non-flagship products to revenue increased to 25% during this quarter. However, EBITDA margins continue to be strong at 42.4%. This leads to two im

42.4%

to revenue increased to 25% during this quarter. However, EBITDA margins continue to be strong at 42.4%. This leads to two important takeaways, one, product diversification and geography diversificatio

the EBITDA margins continue to remain healthy. EBITDA margins are higher on Q-o-Q basis by about 1%, led by lower consumption prices. PAT margins are lower on Q-o-Q basis due to lower non- operati

27%

lower non- operating income. Year-on-year comparison: Revenues for Quarter 2 FY24 declined by 27% to Rs. 178 crores against Rs. 245 crores during Q2 FY23. Volume degrowth and drop in realization

Rs. 178 crore

non- operating income. Year-on-year comparison: Revenues for Quarter 2 FY24 declined by 27% to Rs. 178 crores against Rs. 245 crores during Q2 FY23. Volume degrowth and drop in realization both contributed

Rs. 245 crore

Year-on-year comparison: Revenues for Quarter 2 FY24 declined by 27% to Rs. 178 crores against Rs. 245 crores during Q2 FY23. Volume degrowth and drop in realization both contributed to a 27% decline in r

Rs. 75 crore

p in realization both contributed to a 27% decline in revenue. EBITDA during Q2 FY24 decreased to Rs. 75 crores against Rs. 97 crores during Q2 FY23. Led by lower input prices and a better product mix, compan

Rs. 97 crore

contributed to a 27% decline in revenue. EBITDA during Q2 FY24 decreased to Rs. 75 crores against Rs. 97 crores during Q2 FY23. Led by lower input prices and a better product mix, company reported higher EBIT

39.8%

es and a better product mix, company reported higher EBITDA margin of 42.4% compared to 39.8% during Q2 FY23. We are pleased to report that PAT margins are higher at 29.1% during Q2 FY24 as a

29.1%

f 42.4% compared to 39.8% during Q2 FY23. We are pleased to report that PAT margins are higher at 29.1% during Q2 FY24 as against 27.9% during Q2 FY23. On standalone basis, PAT is Rs. 52 crores against

27.9%

Q2 FY23. We are pleased to report that PAT margins are higher at 29.1% during Q2 FY24 as against 27.9% during Q2 FY23. On standalone basis, PAT is Rs. 52 crores against Rs. 68 crores during Q2 FY23. A

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Guidance — 20 items

CAPEX update

opening

“We expect the water trials to commence during this quarter, while commercial production to kick start during quarter 4.”

CAPEX update

opening

“Our R&D efforts are fortified by our strong in-house engineering and project teams, which help us create global scale and automated state-of-the-art manufacturing facilities at a very competitive price and in time effective rate.”

ESG

opening

“We have now set a next 5-year ESG target for ourselves.”

ESG

opening

“Details of same will be elaborated in BRSR report.”

Outlook

opening

“We will be sharing further details in due course.”

Pratik Bora

“We expect it to normalize by over 100 bps in due course.”

Siddharth Sikchi

“Taiwan customer is a little sticky customer with the competitor, and it might take a little longer to get our approvals, however, this year we would have shipped only about less than 10% of their annual demand, but we expect in ‘24 calendar year that should increase little bit, but not to the extent which I would have wanted.”

Sanjesh

“200 crores of CAPEX, I believe it will be a multipurpose plant, what kind of product are we working?”

Sanjesh

“Any number of products are we working on, more color around that will be really helpful and what is the asset turn, I think we have said two times asset turn earlier, do we stick to that?”

Siddharth Sikchi

“This is a single product dedicated line, and we expect a revenue of about Rs.”

Risks & concerns — 11 flagged

The overproduction in China has led to aggressive pricing of the products, thereby, putting downward pressure on realization during this particular quarter.

— Siddharth Sikchi

On Q-o-Q basis, the 4% decline in revenue was led by drop in realization across the key products.

— Quarter-on-quarter comparison

In fact, improved sales volumes limited the decline in revenue.

— Quarter-on-quarter comparison

Volume degrowth and drop in realization both contributed to a 27% decline in revenue.

— Year-on-year comparison

Although the absolute PAT is lower, the PAT margin is higher, led by better gross margin and limited impact of negative operating leverage.

— Year-on-year comparison

One last question from my side is on the China situation, I think for us to completely revive, I think China has to come back, we have a 64% revenue decline there, how are we reading?

— Sanjesh

Do you think it will drag remain for another couple of quarters or do you think it will take slightly longer than that?

— Sanjesh

You don't see yourself getting replaced by any local vendor in China, that risk is completely ruled out, right?

— Sanjesh

First on the sales part, now Q-o-Q basis, you did mention that there is a volume recovery, just curious from a volume decline what we saw in the last quarter, how has been the improvement and any specific business segment wherein the improvement is more or less out of the three segments?

— Ankur Periwal

My question actually was more specific to this quarter, so 4% Q-on-Q declined, right, wherein you said volumes have grown, so obviously there is a decline in realization here, but from a volume decline perspective, the volume that we were doing in the last quarter versus this quarter, is there any specific segment which is driving or it is pretty broad based?

— Ankur Periwal

— Rohit Nagraj

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Q&A — 11 exchanges

Sir, I have a few questions. Firstly, if you can explain the sequential increase you have seen in the power cost this quarter?

Pratik Bora

During this quarter, the production volume of our flagship products increased by over 25%. However, that increase in production did not totally reflect in the sales because of lower realization and that is the reason the power cost has increased considerably during this quarter. We expect it to normalize by over 100 bps in due course. And secondly, sir, wanted to check on a few accounts you were working on, number one, the status of our backward integration initiatives in HALS through sebacic acid, any comments on that front, sir? So, far, we worked on R&D to establish a process to develop our

This is Sanjesh here. Sir, couple of questions, first on the Agro Pharma Intermediate that we have started, can you elaborate that in this Rs. 200 crores of CAPEX, I believe it will be a multipurpose plant, what kind of product are we working? Will it be sold in the domestic market? Or it is to cater to the exports market? Any number of products are we working on, more color around that will be really helpful and what is the asset turn, I think we have said two times asset turn earlier, do we stick to that?

Siddharth Sikchi

So, let me answer this. So, this block would be Rs. 30 crores of CAPEX. This is a single product dedicated line, and we expect a revenue of about Rs. 100 crores out of it and it is mainly a domestic market product. And it will be agro or pharma? Pharma segment. As the segment in our revenue is performance, agro/pharma and FMCG, so this falls under the intermediates of pharma and agro. Are we supplying? What is the end application, or does it have multiple applications? It has multiple applications, but pharma mainly. And the Rs. 200 crores of block that we have started now to work on, do we ha

I just wanted to understand that Rs. 300 crores CAPEX that we have done in the Clean Fino- Chem subsidiary, so what will be the asset turns there and how fast we will be able to ramp up that part?

Siddharth Sikchi

The asset turn should be between 2.5 and 2.8 and the entire CAPEX to come to 80% capacity utilization will easily take between 2 to 3 years. So, this capacity cannot reach the max utilization will be at 80% or we can reach to 100%. No, typically in chemical plant 80%-85% is a very good capacity utilization. There are boiler breakdowns, there are equipment breakdowns, there are maintenance breakdowns. So, typically 80%-85% is a good norm. Sir, this Guaiacol issue that is there globally, so how long do you see this pain to continue and when we see the demand reviving coming back, any understandi

My question is in terms of, what happened is our volumes have basically tipped off or had a steep fall from the past year and what I believe is our product goes into the critical application in super absorbent polymers which have various applications, so I expect that demand should be sort of stable in nature, but of course, as a steep demand fall. Now, I can see that China has markedly slowed down, there is steep increase in interest rates all over the world as well which is having an impact, but could you give us some more color as you spoken about in the presentation at two third is basical

Siddharth Sikchi

The main issue is destocking. Similar to pharma industry, if you see the revenues or volumes have dropped, it is not that people have stopped taking medicine, but the reason is people had overbooked capacity or overbooked product from us in the past assuming there would be a product shortage or there would be logistics issue which that is what I mentioned in my starting remark that this destocking continued to happen during Quarter 2 and that is the reason why the off take has been lower than it was in the past. And sir, wanted just a clarification, this Clean Fino-Chem, basically whatever CAP

Siddharth Sikchi

So, in quarter, this is expectation right of quarter 3. So, we feel pharma should be good enough, but other we are still trying to understand because November and December months are typically slow because everybody is on the mode of reducing stock across the world. So, November and December are typically slower months for us. I think the best judgment we will be able to give you on the next concall where we will have Q4 picture more clear to us. My question actually was more specific to this quarter, so 4% Q-on-Q declined, right, wherein you said volumes have grown, so obviously there is a de

Just with regard to the outlook for the second-half of FY24, given that it is likely to take another couple of quarters almost for demand to come back, should we sort of expect that volumes gradually pick up from the levels of 2Q over the next 2 quarters or should we continue to work with these volumes and pricing also remains around these levels, how would you sort of expect things to shape up in the next 2 quarters?

Siddharth Sikchi

This would be forward-looking statement. We will see as it comes because we are also amidst trying to understand where the markets and where the world is leading to. Then just on the 2Q results, I am sorry I wasn't exactly able to understand the reason for the increase in power cost on an absolute basis, I guess you were mentioning maybe that percentage terms it has gone up for some reason, but why the absolute increase quarter-on-quarter and also if you could please just share the breakdown of volume versus price on a year-on-year basis for 2Q if that is possible? So, first on power and fuel

Sir, my first question is on this destocking phase that you are talking about, in last 15 years, you would have seen this kind of a situation a couple of times, so from that experience, can you help us understanding this destocking to say restocking, what is the typical timeline in terms of, say months or weeks you have seen in the past?

Siddharth Sikchi

So, typically, to my understanding it should be anywhere between 2 to 3 quarters. See, this time it is also more as there have been two reasons, one, people have really overstocked because of COVID and assuming there will be logistics issues and all that and the second big problem happened was the demand collapsed when the world opened up. So, it has been two-sided sword. So, we expect it should be anywhere between 2 to 3 quarters of this destocking depending on region to region, company to company and product to product. When you see demand collapse that you are seeing across all your, say to

Sir, my question is firstly on the TBHQ HALS side, what I want to understand is you said that about 25% of the businesses this quarter is basically from the new products, which sounds quite interesting, if you could quantify that going forward for the next 3 or 4 quarters per se, how much you expect them to contribute to your topline in terms of absolute terms and percentage of revenue terms?

Siddharth Sikchi

See, this is the first quarter when we have non-flagship products have 75% and we have grown our new products to 25%. Of course, since we are not raising capacities of our flagship product at the moment, so all the growth which will keep coming would be from the newer product. So, subsequently in each quarter and quarter you will start seeing that our flagship product percentage to revenue will start coming down and these newer products will start contributing more and more. Now, I would not be able to give you exact quarter and exact absolute number, but typically if you see if you are able t

Just one from my side, I think you mentioned that your HALS sales have reached 40-50 tons per month, so just wanted to understand what is your internal target by end FY24 and start off FY25?

Siddharth Sikchi

200 tons per month. I don't know how much I will be able to achieve. By end of 25, so you are talking about say probably March 25, our target is to sell this product and new products of this series should also start selling. So, we have a big target in front of us.

Sir, in your opening remarks, you mentioned that there has been a pricing pressure across most of the products, so have we seen those prices coming down to the pre-COVID levels and what is your sense in terms of whether these prices will stabilize at these levels? You mentioned that once China comes back to normalcy, probably the pricing will move, but in the intervening period, what is your sense in terms of how the pricing will behave?

Siddharth Sikchi

To my sense and to my best of my understanding, the prices which we were offering in Quarter 2 were one of the lowest prices we have seen over the last several years, so I do not see further discounting of price unless something new comes up and the commodity prices further or the crude oil prices drops further and the demand is an issue, then the prices might have to further lower, but to my understanding the prices should not lower beyond this point is my sense of this business.

So, thank you so much for your time and to understand the performance of our company, Clean Science and Technology. Again, wishing all of you in advance a very happy and safe and healthy Diwali. Thank you so much. Take care.

Management

Speaking time

Siddharth Sikchi

Moderator

Sanjesh

Arun Prasath

Ankur Periwal

Abhijit Akella

Pratik Bora

Archit Joshi

Huseain

Jason Soans

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Opening remarks

Siddharth Sikchi

Thank you so much. Good evening, everyone. I am happy to connect with you all of you again today to discuss the performance of our company for Quarter 2 FY24. Let me start with giving you a little perspective on the business environment: The market continued to remain a buyer’s market rather than seller’s market during this quarter. The overhang of destocking continued during Quarter 2. The overproduction in China has led to aggressive pricing of the products, thereby, putting downward pressure on realization during this particular quarter. The demand in Europe and to some extent in the United States was unusually low. To summarize, in Quarter 2, we did not see a strong recovery in demand. On financial highlights

Quarter-on-quarter comparison

On Q-o-Q basis, the 4% decline in revenue was led by drop in realization across the key products. In fact, improved sales volumes limited the decline in revenue. The contribution of non-flagship products to revenue increased to 25% during this quarter. However, EBITDA margins continue to be strong at 42.4%. This leads to two important takeaways, one, product diversification and geography diversification has gradually started to reflect and second, despite that the EBITDA margins continue to remain healthy. EBITDA margins are higher on Q-o-Q basis by about 1%, led by lower consumption prices. PAT margins are lower on Q-o-Q basis due to lower non- operating income.

Year-on-year comparison

Revenues for Quarter 2 FY24 declined by 27% to Rs. 178 crores against Rs. 245 crores during Q2 FY23. Volume degrowth and drop in realization both contributed to a 27% decline in revenue. EBITDA during Q2 FY24 decreased to Rs. 75 crores against Rs. 97 crores during Q2 FY23. Led by lower input prices and a better product mix, company reported higher EBITDA margin of 42.4% compared to 39.8% during Q2 FY23. We are pleased to report that PAT margins are higher at 29.1% during Q2 FY24 as against 27.9% during Q2 FY23. On standalone basis, PAT is Rs. 52 crores against Rs. 68 crores during Q2 FY23. Although the absolute PAT is lower, the PAT margin is higher, led by better gross margin and limited impact of negative operating leverage.

On Sales Profile

Revenue contributions from Performance Chemical, Pharma and Agro Intermediates and FMCG chemicals were 67%, 19% and 14% respectively. Contribution from the Pharma segment was impacted due to lower sales of Guaiacol led by ongoing issues in certain international markets with regards to cough syrups. HALS 770 and 701 continue to demonstrate progressive improvement with revenue contribution coming in from the export market as well during this quarter. We are pleased to report that during this quarter, the sales contribution from non- flagship products increased to 25% despite that EBITDA margins were 42%. As we have been mentioning that every product launched will go through following life cycle, a) stabilizing the production, b) securing approvals with clients, c) increasing the utilization levels, d) continually working towards improving yields and production efficiencies in backdrop. Invariably, the outcome of above process is product stewardship which leads to better return on capital

CAPEX update

We have incurred capex of Rs. 165 crores during this quarter of which Rs. 155 crores were invested in our new subsidiary, CFCL. Total investment into CFCL till date is approximately Rs. 275 crores. The progress with construction activity at the subsidiary Clean Fino-Chem Limited is as planned. We expect the water trials to commence during this quarter, while commercial production to kick start during quarter 4. We are happy to report that we have firmly delivered on our commitment of approximately Rs. 300 crores CAPEX through CFCL to commission by Q4 FY24 with entire CAPEX to be funded through internal accruals. We are also in the process of erecting the state-of-the-art pilot facility, which is expected to commission over the next 4 weeks. This pilot facility will considerably strengthen the transition process from lab to pilot to commercial scale production. Our R&D efforts are fortified by our strong in-house engineering and project teams, which help us create global scale and autom

ESG

We continue to work towards ESG actively through delivering products with low carbon footprint, continually evaluating use of alternative raw material fuels and increasing our share in green power. We are pleased to announce that we have successfully cleared the Responsible Care audit. We are now a Responsible Care certified company. We will soon be publishing our Maiden Sustainability Report and would be happy to have your review comments. We have now set a next 5-year ESG target for ourselves. Details of same will be elaborated in BRSR report.

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