Clean Science and Technology Limited (CLEAN) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q4 FY '24 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, Mr. Sikchi.

Thank you so much. Good evening, everyone. I am happy to once again connect with you all to discuss the performance of our company for quarter 4 FY '24. Let me brief you on business environment to set the context for the financial performance. We continue to witness progressive recovery across all the product segments. The recovery is primarily volume-driven. In fact, we have recorded volume growth on annual and sequential basis during this quarter. Coming to the financial highlights. Starting with Q-on-Q comparison. On Q-on-Q basis, we recorded 16% growth in sales. Increase in volumes contributed 23% increase to sales, while lower realization offsetted sales growth by approximately 7%. The product mix and geography mix remained steady during the quarter gone by. EBITDA increased by 14% to around INR 99 crores during this quarter, while EBITDA margin remained strong at 44%. Profitability increased by 20% to INR 75 crores during this quarter. Key highlights of the quarter was volume-led healthy growth in top line. We are also pleased to announce the Board has recommended a final dividend of INR 3 per share. So the total dividend payout ratio increased to 21.4% for FY '24 versus 17.5% from FY '23, led by strong focus towards cash conversion. The cash balance continues to be meaningful at INR 340 crores, despite increased payout ratio and significant CapEx done during the financial year. Coming to Y-on-Y comparison. On a Y-on-Y basis, sales increased by 4% from quarter 4 against this quarter. Improvement in sales is primarily volume-led. Sales profit is more diversified compared to last year, with contribution from principal products being 76% during this quarter as compared to 84% during the last quarter. Same quarter last year, the [ RMC ] percent was lower, led by relatively higher end product prices. Accordingly, on comparatively basis, EBITDA de-grew by 6% to INR 99 crores. On sales profile, the revenue contribution from Performance Chemicals, Pharma and Agro Intermediate and FMCG segment was 67%, 19% and 13% respectively. Performance segment profile diversified with the addition of new HALS 701 and 770 in particular. However, realization impacted the growth. Pharma and Agro segment degrowth was Guaiacol led, which recovered in H2, while DTC contributed positively to the growth. FMCG segment contributed positively to the growth. The newer segment, particularly HALS 770 and 701, continue to demonstrate sequential uptick quarter-on-quarter with volume-led increase in sales by 40%. Of course, the base was lower. To summarize, on a full year basis, 16% degrowth in sales was realization-led. In fact, rebound in volumes during H2 led to positive impact. Steady volumes despite destocking and global slowdown underscores the client stickiness and goodwill towards Clean Science. We are indeed grateful to our customers for placing their trust in us. Further new product contribution increased to 23% from 18.5%. A little bit on the CapEx. We've incurred the highest CapEx in the history of company, approximately INR 235 crores during FY '24. This includes investment in subsidiary of INR 215 crores. During March '24, the operations at CFCL were commercialized, which is in line with our earlier given our guided timelines. Further, we have also set up a state-of-an-art pilot facility operating at significant larger scale. This will further accelerate time lines for our new process commercializations. We are on track to commercialize the capacity for pharma intermediate by Q3 FY '25. CapEx outlook. We are progressively positive on our new trial runs for our new products under Performance segment. And we are in process of firming up next leg of CapEx as we analyze more outcomes of these trial runs. We will announce the capital commitment accordingly towards the new projects in due course of time. ESG. We look forward to outline the ESG targets set by us for the next 5 years in upcoming annual report. We are on track to keep the emission levels, share of renewable electricity and specific energy levels, consumption levels within the target levels. We have commercialized 1.6-megawatt maiden rooftop solar plant at our new subsidiary, Clean Fino-Chem Limited. To summarize the highlights of the year gone by, the decline in revenue during H1 was primarily volume-led. Progressively, volumes recovered during H2. In fact, volumes have surpassed during Q4. The sales profit diversified product wise and geography wise. Despite decline in revenue and product diversification, company reported steady EBITDA margin of 43% for the full year FY '24, which is in line with FY '23. On CapEx front, the commercialization has been within cost and time guidance. Thank you so much.

[Operator Instructions] First question is from the line of Rajesh Mangal Agrawal from Rajesh Agrawal & Co.

Am I audible?

Yes, sir.

I just to -- I'm a retail investor. And I want to know whether the CFCL is the only our subsidiary?

Yes. There are 3 more subsidiaries, but those are nonmaterial in nature.

Okay. And in our presentation, you have shown this investment. This investment pertains to the investment made in subsidiary, I think?

Yes. In the current asset book, the investments are the investments in the treasury book. In the noncurrent, the majorities into the subsidiary.

Okay. Just tell me one thing, Boss. In this investment in the financial year 31st March '23, we have sold this position at INR 281 crores. And right now, we have sold it at INR 292 crores. And we said that we have invested INR 215 crores in this CFCL? How these figures [indiscernible]?

Yes, yes. So that's what I referred to noncurrent investments for long-term investments. There, you see the increase, which has increased in the subsidiary. The numbers which you're referring to is the investments in the treasury book, which is shown in the current portion.

Okay. Okay. Okay. Correct. Correct. And what this CFCL is commercialized in March '24, okay? So how much we expect the top line growth and EBITDA margin from this CFCL?

These are futuristic statements. So we would like to avoid making such future statements.

No. But being an investor, I think company don't have any problem to give this guidance?

See, typically, if you see our past record, this is as per our past record, our asset turn has been close to 2.5x to 2.7x. So based on the investment, which we have already made, hopefully, in the next 2 to 3 years, the top line should be closer to INR 800 crores based on the investments, which we have already made. This is, again, as per our past records.

Correct. Correct. Correct. And what is the worth in hand -- order in hand right now?

We don't work like a contract -- like a long-term contract on these businesses. These are quarterly-basis businesses or monthly-basis businesses because the primarily our first markets are Indian market where these UV stabilizers will be sold. So these are decided on monthly or on a quarterly basis.

Okay. But from this revenue mix by geography, I come to know that the Indian market is in FY '24 is only 36%.

So that I was talking about only CFCL, about the subsidiary. What you are talking about...

And the CFCL market is only in India?

No, no. It is not only India, but our first market to go market is the Indian market because there are huge imports of these UV stabilizes into the Indian market. So hence, these are our first market. We have already started exporting to Europe, but we don't have these long-term contracts for these businesses.

Next question is from the line of Sanjesh Jain from ICICI Securities.

A couple of them. First one, help us understand ex of HALS, what has been the growth in volume for this quarter? I think the whole point is to understand whether the underlying growth in the volumes will remain strong.

No, no. HALS is a small portion, Sanjesh, because it is just recently commissioned. But the other products, which we had like the antioxidant, say, DCC or TBHQ, these products, which were running at lower capacities, have now started picking up and are running at decent capacity levels.

So the growth in volume is across the categories, across the product.

Absolutely, for all segments, all products.

Sanjesh, there is no one-off in this.

That's fair enough. That's fair enough. Second, on the HALS, I just wanted to understand now that we have ramped up and there has been a visible growth. Can you, Siddharth, talk a little bit on 770 and 701 because I think 770 was more an India product, 701 was more of an export product. How has been ramped up in each of these product customer approval?

So let me start with 701. So again, as I mentioned, these are variety of applications, but major is into water treatment chemicals. The major market remains out of India. And fortunately for us, of course, it has taken -- I mean because these are export products, there are large customers who have never bought from India before. So we have now, I can say that we are approved with almost all the major accounts globally. That is one good news. Second, we have now started giving trial orders or commercial shipments to all of these suppliers -- to our customers, I mean. And I think over the next 3 to 5 months time frame, we should reach a decent volumes of about 1,000 tonnes per annum basis. So that remains in 701. In 770, as I have said that gradually, we will -- I mean, the Indian market should start picking up for us, which has happened a less slower than as we had anticipated. But currently, we have at least, I think, 50% of Indian market is now supplied by Clean Science. And I think over the next 3 to 4 months period, I think this number from 50% should become 60% to 65%. With our other range, which are now starting within the next 3 to 5 weeks' time frame, the confidence of customers that we have more products into the basket, the pickup in the Indian market should gradually again increase, and our endeavor is to touch 70% to 80% of the total Indian market for all these HALS should be with us. Regarding export market, for UV 770 in particular because that is the product, which we have commercialized, we have already shipped material to Europe, Middle East. Now we are already in discussions with customers and distributors in North America for this entire UV range.

That is super helpful. Just a couple of clarification here. One -- first on the 770, we are already 50% market in 770. That's what you said, right?

That's what I said.

It is only for an UV application or you're telling entire 770 as a product, we are 50% market share?

No, no. It is only -- see, India was buying between 200 to 250 tonnes. We are already selling roughly 100 to 110 tonnes a month now to Indian market. So on that basis, I assume we are already at 50% market share.

That is very, very good. And pricing, how much discount they would be today to the imported pricing?

See, typically, this product is now about -- see discount of 2.5% to 3%.

That's it.

Because we give that advantage of not letting them stop the material. We can do just-in-time supplies, which our competitors cannot. I mean, the European competitors certainly cannot. Even the Chinese cannot. And small buyers, who are buying between 3 tonne and 5 tonne, they have to typically buy a full container from our competitor, whereas in my case, they can only buy what they need. So they don't -- I mean these are additional perks, which I'm offering along with 2% to 3% price discount.

Got it. Got it. Second follow-up on 701, Siddharth. I thought earlier we thought it was Agro Intermediate and that's where the large demand was there for 701. And now water treatment is an additional market. Where are we in that pharma intermediates as a product for 701 or application for 701?

No, no, that was P-BQ. I mean, 701 never had any market in Agro. That was [indiscernible]. P-BQ -- 701 is a big market in water treatment and some intermediates, which companies make which they don't want to disclose to us.

Okay. Okay. That's fair enough. One follow-up on 770 because we are already 70%, 80% of India market. That means we need to incrementally place our product in export. You did mention that European Union, Middle East and North America are opening up. How do you expect that ramp-up to happen? And second is that we earlier said that by end of March, we want to see 200 tonnes per month. Do you think you can exceed that with this kind of already sales coming in?

See, first of all, I said 50%, not 70% Indian market. So we are already at 50% Indian market. That is one correction. Number two, export market typically takes a little longer because the approval process, then appointing right distributor, stocking raw material in U.S.A. So U.S.A. could take a little longer, though I would love that things should move as fast as possible. But touching 200 tonnes by next March should be doable. I don't think it is absolutely non-doable, but you will have to give me 2 more quarters to see how export market picks up.

Fair enough. Fair enough. Just one last question before I join back the queue. It's more numerical in nature. The other expenses is today at INR 41 crores per quarter. Have we reached the free cost in terms of operational in all the plants commissioned or there is more cost which is to come in the coming quarter?

No. At Clean Science, it's almost baked in because the capacities are operating at optimal levels.

And for the subsidiary?

Subsidiary -- I mean, the overhead absorption rate has to -- will increase as the operations scale up because just 1 month of operations.

No, no that I got from the margin perspective that will play out. From the cost perspective, there is more cost, which is yet to be recognized in the P&L? This is more from a modeling perspective how to build the cost.

Yes. Additional costs will flow in as the new plants also commercialize.

Okay. Okay. So out of 17,000 metric tonne of HALS, which we were looking at, how much of that capacity is already commercialized and how much is it to be commercialized?

No. We'll share that in subsequent time and it's not 17,000, 10,500 tonnes, which we had announced to exchange for HALS. So that only 770 is commercialized and further new products will announce in due time.

So we are taking one product at -- so the capacity is all installed, but we are taking one product at a time. So we take one product because these are large capacities. So establish it, let it work, then go to the second product rather than starting everything together.

That is fair enough. But just, Siddharth, one operational question. All these plants are dedicated plant or multipurpose plant because they are all from the same family, right?

Absolutely dedicated line. See so the main intermediates are common, which are the basic starting material for all the HALS, but the subsequent lines are dedicated lines because every process is a very different process. Now UV 770 is a 3-step process. But UV 944 is a 7-step process. So they cannot the raw materials are absolutely different despite being in the same family.

So how many initial steps are common or how large is your common facility for the feedstock and...

So there are only 2 common feedstocks. One is called TAA and one is called TMP. So these 2 feedstocks are common for all the HALS. I mean, they are making the building blocks. So those capacities are upward of 10,000 to 12,000 tonnes. So those have been operational now. Of course, to whatever requirement we have, we are only running to that. But rest lines are all individual lines.

That's very clear now for me -- that's super helpful. Best of luck for the coming quarters.

The next question is from the line of Parth Mehta from Vallum Capital.

Am I audible?

Absolutely, sir.

Sir, just 2 bookkeeping questions I had. One is that we have a higher inventory and [indiscernible] levels in terms of absolute value and number of days. So just wanted to understand what has led to this increase? And how do we plan on reducing this?

Right. Yes, so inventory, as you rightly wonder on value basis, it's almost in line with last year. But as you would have noticed, quarter-on-quarter, there is increase in sales. And Q4 was a best quarter for this year. That's why the inventory shows up a little higher number. Apart from that, the [ WLT ] stock is also a little higher. Otherwise, raw material finished good inventory is less than 30 days. So there is no price risk there.

Okay. Great. And just another one, if you can help me with the capacity utilization for MEHQ and BHA?

So we share segment-wise capacity utilization. Product wise, we are not sharing. So for this quarter, Performance segment, the utilization was close to 70%.

Okay. And other 2 segments?

Yes. So Pharma was -- Pharma was also in that range. FMCG was a little higher, close to 75%, which is 4MAP.

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

First, continuing with the discussion on HALS. Amongst the other products that we are supposed to launch, while 701 is domestic focused. How are the other products? They will be largely export focused? Or there will be mix share?

First, 701 is export driven.

Sorry, 770 focused?

770 is domestic as well as export. The next product, which we are going to launch probably in the next 3 to 4 weeks are, 622, 944, where there are both markets, I mean, domestic as well as export. But of course, because now we are -- people are -- know us now more in domestic markets. So of course, the first point of sales would be from domestic market. Following this would be 119 and 2020. Again, they are partly domestic, but largely exports.

Sure. And as mentioned 50% of 770 is already being captured by us. What will be the total size of India across, let's say, these 6 or 7 products that we are planning?

So 770, 622, 944, volume-wise, I think it should be closer to 350, 400 tonnes a month. I mean put together everything, about 5,000 tonnes per annum.

5% to 6%, yes.

Okay. Fair enough. So these will be, so to say, the earlier or the low-hanging fruit for us, which could be sort of captured in the near term. And exports, as you mentioned, will take some time for us to ramp up.

Absolutely, sir. Just a little point there. See, originally, when we started 770 also, it was a very tricky to convince. But now that customers also overseas have heard about us. So I think going forward for 622, 944, it should not be as uphill as it was to start with 770 because there would be same distributor, same customers buying these products as well.

Yes, sure. So which was my question as well. So distributor-led network is already in place, but the core product approval, which probably the client will take, how much is that time typically?

3 to 6 months.

Okay. Great. And pricing-wise, you mentioned India discount is only 2.5%, 3%. How are we placing, let's say, 770 or even 701 in terms of pricing globally?

See, 701, I think again, the discount is less than 5% because the advantage we have is 701 is typically made by only the Chinese company. So we are the first non-Chinese company producing 701, okay? So that gives us a little advantage. In 770, again, the difference delta, which people are asking, is about 5% max globally.

Okay. That's great. Secondly, on the revenue mix here, you did mention on an FY '24 basis, we are, give and take, flattish on volumes on a Y-on-Y basis. If I look at specific geographies, China and maybe Europe has seen a sharper decline year-on-year. If you can help us get some sense on how has been the volumetric growth or performance across the international markets, China, Europe and U.S. largely?

See, basically -- see, we are seeing increase in Indian markets because of these products, 770 in particular and also our pharma intermediates, also our antioxidant for food and feed industry. So hence, Indian market is growing for us. Europe, North America has been very, very steady for us. Of course, North America -- Europe, in particular, with this UV HALS sales picking up, should slightly increase. North America has been flat because there is no new products which we have sold in the United States so far.

Okay. So Europe, you mentioned on the existing portfolio, we are flattish year-on-year or there is a dip in terms of volumes?

It is a gradual increase for new products. But in terms of our existing products because of the client demand, there has been a slight reduction. So net-net, it should be flattish.

Sure. And HALS will be a bigger -- Europe will be a bigger market for HALS?

Yes. That's the hope.

Great. And just lastly on the margin front. Now given as we ramp up, let's say, HALS or the other products also which we have seen a pretty healthy recovery overall in terms of volumetric growth, where do you see margins stabilizing on a blended basis?

See, on blended basis, as on today because there is strict competition from China. And of course -- see, any time when there is a new entrant in the business, there is always a stiff competition. Customer also do not want to discount us on pricing, plus it takes a larger time for approval. So on a blended basis for this year, we are not targeting more than 15% for the subsidy. For the new products in the subsidiary, which is mainly HALS.

Okay. No -- so my question was more on a medium term, not immediate this year, but let's say '26 or '27 once the subsidiary also see some ramp up.

Then I think we should touch above the 25% margin.

On the subsidiary business. Okay. Great, Siddharth. That's very helpful.

Next question is from the line of Arun Prasath from Avendus Spark.

So you spoke about the HALS, 701, 770 in detail. On this other grades, there is 672 et cetera, end customers are same, distributors maybe common, but is the end customers are same and applications are the same category? Or is it different?

Paint categories. So paint..

No, no, end categories.

Can you please repeat the question, Arun?

So I was asking the grades -- the other grades, which you will be obviously scaling up, the end customer is same or is it different?

No, no, same, same, same. So only difference is different in quantity. So there could be a customer who could be buying either quantity of 770 and smaller quantity of 944. And there are other customers whose requirement of 622, 944 would be higher than 770. So the customer base remains more or less the same.

Okay. So which means that you already once tap 770, you will be -- that's the reason you are confident that you will be able to scale this up faster?

That is the hope, sir. And that is what we also feel that because when we started 770, people were -- people had not even heard about Indian producer and people were not confident of our qualities and supplies. But now that we have been successfully supplying over the past 1 year, so that confidence has risen dramatically. So now when I launch the other range of products, it should not be a very -- not as difficult as 770 was.

And what is the price difference of these grades with respect to, say, 770? How premium these grades are?

So 944 is -- suppose if 770 is $5, 944 should be $9, 119 should be about $10, $12. So these are all expensive. I mean, 770 being the cheapest.

Right. And then our capacity, I heard you that the intermediate is common, but downstream to the intermediate that is the TMP and TAA is different. But how fungible are these capacities? The question is, if tomorrow, if you want to increase more of the high-value grades, will you be able to do it or you need to put the CapEx to this?