Clean Science growth hinges on HALS ramp-up and margin recovery

Investment View and Valuation

Motilal Oswal Financial Services reiterated its Neutral rating on Clean Science & Technology in its November 1, 2026, 2QFY27 result update. The broker considers the operating performance broadly in line, despite continued margin pressure from elevated raw-material costs and aggressive pricing by Chinese competitors.

Motilal Oswal values Clean Science at 25 times FY28E EPS and retains its target price of Rs 770.

2QFY27 Financial Performance

Clean Science reported 2QFY27 revenue of Rs 3,000 million, up 22 per cent YoY and above Motilal Oswal’s estimate of Rs 2,661 million, driven by growth in all three segments.

Segment Performance

In 1HFY27, revenue, EBITDA and adjusted PAT grew 16 per cent, 1 per cent and 2 per cent YoY to Rs 5,700 million, Rs 1,900 million and Rs 1,700 million, respectively.

Margin Pressure and Competitive Environment

Margins were the key weakness. Gross margin declined to 57.3 per cent from 60.7 per cent in 2QFY26, while EBITDA margin fell to 30.8 per cent from 35.6 per cent.

Management attributed the pressure to a 50-100 per cent YoY increase in phenol, acetone and methanol costs, along with higher coal and freight expenses. Clean Science could not fully pass higher input costs to customers because Chinese competitors continued to offer lower prices. Management is prioritising market-share retention instead of aggressive price increases.

Capacity Expansion and Backward Integration

Management expects HALS capacity utilisation to rise from 35-40 per cent currently to 55-60 per cent over the coming quarters as higher-grade products scale up. HALS capacity is planned to increase from 11,500 MTPA to 12,500 MTPA, with incremental capacity focused on advanced grades.

Commercial shipments of advanced-grade HALS to European customers are expected to start in November-December 2026. Backward integration is under way, including an operating ethoxylation facility and in-house production of an intermediate currently sourced from China from the next quarter. Management indicated that backward integration could improve margins by about 5-7 per cent in the relevant HALS product segment.

New Product and Capacity Ramp-Up

Performance Chemical II is expected to begin commercial production in 4QFY27, likely during January-February 2027, with first-year utilisation of 20-25 per cent because of product stabilisation, customer sampling and validation.

Hydroquinone and catechol capacity utilisation is 30-35 per cent, largely for captive consumption, although small external sales have begun in Europe and India. The company has also begun supplying small quantities of a new antioxidant using existing assets without incremental capex.

Outlook and Earnings Estimates

Motilal Oswal expects macro headwinds, high raw-material costs and Chinese competition to persist in the near term. However, it identifies the following as growth drivers:

• Advanced-grade HALS ramp-up.
• A greater mix of value-added speciality chemicals.
• Scaling of the Chemical I plant.
• Performance Chemical II commercialisation.
• Backward integration.

The broker expects revenue, EBITDA and PAT CAGR of 20 per cent, 16 per cent and 20 per cent, respectively, over FY26-FY28. It raised FY27E and FY28E revenue estimates by 5 per cent and 2 per cent, while reducing FY27E EBITDA and PAT by 2 per cent and 3 per cent, respectively, due to margin pressure.

Key Risks

The investment thesis could weaken if raw-material inflation remains elevated, competitive pricing limits pass-through, or new capacities and advanced HALS products ramp up more slowly than expected.