Clean Science and Technology Limited (CLEAN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 Earnings Conference Call of Clean Science and Technology Limited. We have with us on the call Siddharth Sikchi, Managing Director and Promoter; Sanjay Parnerkar, CFO; and 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, Mr. Siddharth Sikchi.

Thank you so much, Ira. Good evening, everybody. Thank you so much for attending the call on a Saturday evening. So let me start by welcoming everyone and a warm welcome for the quarter 1 FY '27 earnings call of the company, and I thank you for joining the call. Let me first speak on the business environment. The quarter performance shall be viewed in backdrop of geopolitical headwinds, impacting raw material supply chain and its costs. Nonavailability of shipping vessels impacted timely export of goods, leading to supply side challenges. Further, the raw material costs in China were not impacted as much as they were compared to India. Despite external challenges during the quarter, Clean Science reported a steady performance during the quarter. The company was able to improve revenue, maintain operational stability and continued progress on its value-creating initiatives. We are also pleased to report our highest ever consolidated sales in company's history, reaching approximately INR 264 crores during the quarter. Let me speak on the stand-alone business performance. On a sequential basis, the revenue improved by 5% to INR 203 crores, largely due to increase in realization in all the products. The EBITDA and the PAT margins are at 43% and 36%, translating into an EBITDA of INR 87 crores and PAT of INR 73 crores. The Q4 FY '26 EBITDA impact after adjusting the one-off operating expense transactions is roughly INR 83 crores and INR 53 crores, respectively. Thereby, the current quarter EBITDA and tax reflected a growth of 5% and 37%, respectively. The Q-on-Q increase in revenue was primarily led by improved realization in all the segments. Speaking on Y-o-Y comparison, the sales were moderated by 6% during the quarter. The revenue moderation was primarily led by decrease in sales volume, which was on account of supply-side headwinds, as mentioned earlier. The demand environment continues to be steady. On consolidated business performance, the [ half scale ] continues to drive operating leverage and sustainable profit improvement. HALS is now 22% of our sales, and we have been able to derisk our reliance on the top 4 legacy products by moderating their share from 85% in Q4 FY '23 to 60% this quarter. Another important point was that CFCL reached an important milestone by becoming operationally self-sustaining. Having fully recovered its operating expenses, we now shift from investing phase to monetizing phase. Our first year of HALS sales were entirely domestic. In contrast, the current quarter reflects a much more diversified geographical mix with exports contributing nearly 50% of the HALS sales. On a sequential basis, the consolidated revenues grew by 7% to INR 264 crores, EBITDA and PAT are 37% and 28%, respectively, which stands at INR 96 crores and INR 73 crores, respectively. On Y-o-Y basis, the revenue increased by 10% during the quarter and the increase in revenues primarily led by consistent scale-up of our HALS business. Hence, the sales profile looks like performance, pharma and FMCG respectively, 83%, 10% and 7%, respectively. I would like to take a minute to discuss the key business development which happened during the quarter. Point one, we entered into a strategic collaboration with our switch partner called Geneus Chem, this represents an important step in the next phase of our health journey. This will provide Clean Science and entry into differentiated advanced grade of health chemistry that are technology-intensive, value-added and aligned and evolving global customer requirements. Taken together, these developments reinforce our confidence that health platform can evolve into a much stronger growth driver for the company over the coming years. With expanding customer acceptance, improving export penetration and a richer product basket we believe that the platform is steadily moving towards more meaningful scale, stronger margins and create strategic importance within the company's portfolio. The stabilization of the hydroquinone on [ catechol plant ] has been largely completed, and our operations are now progressing well. We have received the necessary customer approval and are ramping up for commercial supplies. As the production scales up, we expect a gradual increase in revenue in the coming quarters. On the CapEx update, the Performance Chemical 2 will get commercialized by quarter 3 FY '27. And during the quarter, capital infusion in the subsidiary was approximately INR 100 crores with this total investment in the subsidiary stands at approximately INR 850 crores. I think that's all from my side, and I'm open for any questions and answers.

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

Got a couple of questions. First on the HALS, what was the volume this quarter because the [ consultant ] subsidiary, it shows we have grown close to [ 170% ]. So what was the mix of volume and pricing and the -- how much was the contribution of the products beyond 701 and 770.

So in terms of price realization, Sanjesh, the product mix has improved from 770, 662, we have now moved to the higher grades. So I think the average prices have moved from 440 or to 550. So this is in terms of price realization. And in terms of volume, [indiscernible].

Volume had into 1,000 tonnes. And the product mix has significantly improved to the higher grades of HALS, meaning, I mean, last quarter where almost 50% of contribution came in from HALS 770 this quarter, it has come down to 35-odd percent. And hence, the gross margins have improved on the subsidiary level.

Got it. Got it. We were looking at was close to 3,000 metric tons for HALS this year, you think you can do much better than that. We have started with 1,000 metric tonne in Q1.

Yes, yes, my HALS guys said, yes, they can do it.

So what are we looking at now? And even the export has picked up, you mentioned that 50% of the revenue now HALS is coming from the export market. So what is the realistic number we are looking at in HALS for FY '27?

Annualized this quarter, it's [indiscernible]. So I mean, if you just annualize this also, this will reach to INR 250 crores, INR 300 crores of annual revenue.

That we are very comfortable, correct?

Yes, that should be comfortable.

Now second question on the gross profit margin. Last year, we were hovering under 40% this year consistently above 40%. Was there any benefit of low cost [indiscernible] we were carrying and price increase will help us and lower raw material costs is benefiting on gross profit margin? Or you think this 43%, 45% of gross profit margin in this segment is sustainable?

I think it should be sustainable, and we had no real advantage of cheap raw material. In fact, since moving to higher grades and, of course, improving our operational efficiencies has helped us to get to these margins.

Got it. Got it. One last question on HALS, can you give us more detail on Genesis. Are we also trying to acquire 25% in the distribution company, and it's more like a distribution company, right? They are not really a technology company.

How do you get that?

No. That's what I read it in the press release, I was a little confused. So what is the transaction between HALS and Gelesis?

No, no. So the deal is if you go through the website, the founders are highly technical people, and they have come up with advanced health technologies. They have developed and patented products in Europe, U.S., Japan, and I think also China, I'm unsure of China. And these are far advanced level of [ nor HALS ], which is called. And these products will now be made at Clean Fino Chem and supply globally. With this, we will get entry into some of the very advanced level of customers who are -- who would also buy these advanced grades but also help us in our other portfolio of HALS. So it's a very [indiscernible] driven company.

And the tech transfer is happening from them to us? Or how is it?

Yes. They have developed this very interesting technology and this patented product, and this is the tech transfer is happening and the plant will start in quarter 3 this year.

And what is [indiscernible] for all this?

Sorry?

So the tech transfer and all is for the production, and we will be official contract manufacturer for the [ switch ] company. Is that the way to think of it? We are a contract manufacturing with that tax belongs to the customer.

No, no, no. We are also doing joint marketing. Yes. So [indiscernible] the joint marketing this product.

And the product will be exclusively supplied to them or we are free to supply to anybody?

So we have some geographies defined between us so that we don't want clash. But everything will be like a co-branding, yes. It would be like a co-branded product where their name and our name will appear on the packaging and all the documents.

Got it. And what is the revenue potential we are looking for from this partnership in '29 -- '28, sorry.

In overall 3- to 4-year period, we are looking at INR 300 crores to INR 350 crores of revenue. Additional [indiscernible].

From this partnership?

Absolutely.

Got it. Got it. That's pretty clear. Last on the legacy business, the decline was largely because on a Y-o-Y basis, it was largely because the nonavailability of the raw material? Or there was be -- it's only because of raw material [indiscernible].

Yes, because the main primary supplier in India had to shut down the facility due to non-availability of their key raw material protein. So we had those I think, about 2 weeks of ore shutdown, which led to this. The demand is absolutely steady.

And starting Q2, we should see all those recouping and then all the volume we should be to the normal levels -- or there is still challenges?

[indiscernible] No, volumes is not an issue. Raw material pricing is an issue and availability of shipping vessels. I'm sure this is across the industry.

Got it. Got it. One last question. What is the now economical difference between [ anisole ] to MEHQ versus it's Q2 and MEHQ are we still competitive? Or you see Chinese competition still being intense in the MEHQ value chain.

So far, we are not seeing otherwise, you would not see these numbers, right?

Correct. So we believe that MEHQ is still not as competitive for us to threaten the market share?

I think so.

[Operator Instructions] Next question is from the line of Ankur Periwal from Axis Capital.

Congratulations for a good ramp up in HALS. First, a clarification on this strategic collaboration. You said the product will be jointly marketed by you and the partners there. So the global markets are divided that these ex countries go to Clean Science and the balance go to you? Or how is it? And this [ 3.5 billion, 4 billion ].

More or less. I'll answer one thing at a time. See, they are based in Europe. They have highly -- they are present there, and they have already conducted a lot of trials over the last couple of years and have established a solid customer network. Okay. So there is no point in us duplicating those efforts. So hence, there has been a clear geographical differentiation, wherever we have done enough work they will market it. Wherever they are not present and we are present, we will be doing it. So it's a very, very collaborative partnership where we have very open discussions to understand where -- who is where and wherever strengths to be needed, we will do the need for us because it is all going under co-branding.

Sure. So this [ 3, 3.5 billion -- 300 or 350 ] crores revenue that you are talking of, this is a product of -- as a sort of output of this collaboration. Is it the case that you are manufacturing from them on their behalf as so for whatever they sell, you will be manufacturing here in India? Or this 350 sale is only from your fresh sale as a B2C or B2B to B2C?

It is only from us. Their team is over and above. I am telling that I'm just giving an hypothetical example. If I am selling them at [indiscernible] EUR 30, that is my revenue. And if they sell at EUR 40, that is EUR 10 is their revenue.

Yes, which is fair. But your direct sale is this INR 300 crore target that you're talking of? And if you are manufacturing anything on the partner's behalf that's the top-up or everything is inclusive of the INR 300 crores , INR 350 crores?

Direct sales to the market is incremental to this year.

Yes. INR 300 crores is only with them because they have prescribed volumes which they have some understanding on our commitments on over and above whatever we develop if we sell 100 tonne in India, that is over and above this.

Okay. Okay. Got it. And fair to say that given that you are saying that this is further differentiated in a more advanced versions of air grades, we were not supposed to manufacture these ones or there is some overlap, and this will be having much higher realization here?

No, no, no. This is a further better product and one of its kind. And hence, these are all patented products by [ there ].

Sure. And whatever we are making on health on using tech, that continues as it is, which is the ramp up that [indiscernible]?

One of our raw materials, 2020, which we didn't be making will be a key starting material for this chemistry. So this is an additional market for our 2020.

Okay. Okay. That's clear. Secondly, on -- so yes, okay. Yes. Secondly, on the [ Clean ] agreement, wherein we are supplying the key ingredients for food and feed, if you can put some light there.

I mean the life is that we have very, very close relationships with the customer over the last decade. And I think they are increasing their demand. We are being fulfilling that. And because we would be making additional CapEx on some of these products. So we thought both of us decided to enter into a longer-term contract for a minimum period of 5 years -- for a minimum period of 5 years where we will be supplying their needs of these products, and that is where it is. So it's a very, very interesting collaboration for us because this gives us an assure volumes from the largest customer in the world. So therefore, currently buy BHA, BHT, TBHQ which are all -- and , these are all our product portfolio, which we supply to them, and we are now an exclusive -- I mean, more or less, we will be the supplier for all these products.

Sure. So a few clarifications. One, [ Chemin ] must be getting this source from somewhere? Or was it captive for them? And who are we replacing?

No, no, it was -- so [ Chemin ] is an end customer, they made formulation for pet food industry. So they are a manufacturing company with global locations, and we will be supplying these 3 ingredients to all their global locations.

Okay. So the customer continues just that the size and scale is much higher now and you're getting a 5-year commit.

This is not a new customer. He continues to be our existing customer for 10 years. We'll just increase the wallet share with that customer.

Sure. And will this commitment -- yes, good.

Will this commitment?

Sorry, Will this commitment require you for another incremental capacity addition or the existing capacities are suffice to fund this?

No, we will need additional capacities, and we have already started the process of that.

Sorry, there will be requirement of additional capacity, you said?

Yes. Yes. Yes.

Okay. And third bit on the margin profile on the stand-alone side. while revenues have been, you highlighted in your initial comments as well, the Q-on-Q increase is largely led by pricing, volumes are flat. The margin slight dip that we are seeing here, even on a Q-on-Q or on Y-on-Y basis, is largely because of the pricing volatility, RM volatility? Or there is a further pressure on the end product pricing also?

No, I think the major factor is the raw material pricing because of these Middle East crisis. So you can see there has been decline, I mean, increase in our RM prices.

Okay. So and end product prices here remain stable. So from a competitive intensity perspective, no changes at the global level.

Not at the moment.

Okay. Fair enough. And just on the stand-alone side, what could be the domestic export mix for the quarter, if you may help with that number, please?

65, 35.

65, 35. Okay. And lastly, any -- if you can guide on the CapEx, what should we take as an annual run rate going ahead, given there could be some capacity expansion times there?

Actually, we have not worked out in that detail, but it's not going to be too much. We are still working on it, and I'll be able to let you know in due course.

Next question is from the line of Abhijit Akella from KIE.

First one, just on the supply chain disruptions that impacted volumes in the quarter I was just wondering if any possible to share some color on how much better the earnings would have been? I know the quarter is already significantly improved. So my compliments on that. But could it have been somewhat significantly better had it not been for these issues?

Yes. So of course, we lost a couple of weeks, I think, to be precise, about 2 weeks or so in production, so of course, if you would have been able to produce, you would have got higher revenues, that is number one. And number 2 is also with these all labor issues we faced because of these gas issues and all. That was another challenging time. So if these issues weren't there, then I think we would have seen a better quarter.

So things are looking much smoother now in the second quarter, is it?

Yes. the issues which I mentioned with availability of the prices are volatile, that is still an issue, but the availability is there, which was not the case in quarter 1. So yes, so I think all those issues are now behind us, except the current volatility.

Understood. And on the price hike side, were you able to fully pass along all the input cost increases that happened last quarter? Or are there still some further increases that you're taking.

No. Wherever we had long-term contracts, we are respecting most of them. And so in that case, we are not able to pass on and Also, it is not like. I mean, we were not able to pass on 100%. In some cases, we were able to pass a percentage of the price increase.

Okay. Fair enough. So compared to the June quarter results, which we are just seeing, we should not expect any significant price increases benefit next quarter, right?

Yes, price increase might be a big question.

Okay. Understood. Secondly was just on this INR 300-odd crore revenue number that you quoted for the Genius tie-up. Just wanted to clarify that this was a cumulative number.

Of course, it's a cumulative number over the next 4 years.

Yes, understood. So the peak number in year 4 might be say some INR 100 crores plus minus, somewhere in that range, is that, right?

Yes. That understanding is right.

Okay. Great. And on the Performance Chemicals 1 and 2, I know you made some comments, but if it's possible to just share your thoughts on how both those projects are going.

Yes. So the hydroquinone I mentioned, we started the line somewhere in quarter 3, between October, November, December, the trials. The product trial started in first couple of months. Of course, then we had these crisis, raw material shortages. So we were not dedicating too much raw material to that facility, but running our regular businesses. And again, we restarted the operations in Atlante and now the plants are more or less stabilized. In the meantime, we took this period to sample with our all international existing customers. And most of the sampling processors are almost over. We have got some approvals -- and now I think starting August, September, the revenue should also start coming in. And plus there will be operational efficiencies improvements will also keep happening as we ramp up the capacities.

Great. And just one last -- yes, sorry, please, go ahead.

Okay. On Performance Chemicals 2 the plant, we expect to start in quarter 3, which would be November, December [indiscernible].

Yes. In terms of the ramp-up for Performance Chemicals 2 any thoughts on that aspect?

Thoughts in the sense?

I mean just with regard to time lines, should we expect a sell.

So let the quarter 3 and quarter 4 will majorly go into setting up the lines and getting the right product quality. So we expect the major revenue shall come from quarter 1 next year.

Okay. Great. And just 1 last thing from my side. On the Chemin agreement, congratulations on that, by the way. So how large is this customer as maybe a share of the overall world market for these relevant products. That was your question. And I guess this agreement now basically preempts any other possible new entrant into these products from getting into a tee up to this company, right? Yes.

Absolutely. He is the largest buyer of some of these ingredients. And the relationship now gives both of us, both Chemin and us, I mean, the strategic alliance where we make sure that there is no shortages. I mean in all these difficult times, we have been able to supply it without any price hikes, which is given them that confidence over the last several years. And hence, we have entered into this definitive 5-year of contract. And yes, you are right that I do not see any scope for any other entrant or a new entrant or any competitor from India or globally to get into this alliance.