scorecardresearchClean Science and Technology stock drops 25% in value but JM Financial

Clean Science and Technology stock drops 25% in value but JM Financial maintains 'buy' rating; here's why

Updated: 14 Apr 2023, 04:28 PM IST
TL;DR.

JM Financial is optimistic about Clean's financial performance in the coming years. It predicts that the company will achieve a gross margin of 48% in HALS products in FY25E and gradually increase it to 56% by FY28E.

Clean has been generating ample free cash flow, which gives it the wherewithal for inorganic acquisitions to support earnings growth.

Clean has been generating ample free cash flow, which gives it the wherewithal for inorganic acquisitions to support earnings growth.

Clean Science and Technology, a chemical manufacturer, has witnessed a significant correction in its share price over the last seven months, losing over 25% of its value. On March 29, 2023, the stock reached its all-time low of 1,238 apiece. Over the last four months it has experienced a continuous decline and has corrected by around 15%.

Global brokerage firm JM Financial believes that this is due to the pessimism built around the overall margin contraction led by the launch of HALS series of products.

The brokerage remains positive on the stock, even after the sharp correction.

JM Financial is optimistic about Clean's financial performance in the coming years. It predicts that the company will achieve a gross margin of 48% in HALS products in FY25E and gradually increase it to 56% by FY28E.

The brokerage believes that the company will be able to maintain a 26% EBITDA CAGR over the FY23–25E period with only a 2% contraction in EBITDA margin.

JM Financial recommends buying into the current correction for a structural 25% EPS CAGR over FY23–28E and reiterates its 'buy' rating with an unchanged March 2024 target price of 2,255 apiece. This target price implies a substantial upside of 54.24% from the stock's previous closing price.

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Stock Price Chart of Clean Science and Technology.

According to brokerage calculations, the company can achieve a gross margin of 55–58% in HALS products on a steady-state basis. However, taking into account the possibility of lower yields in the initial year and marketing discounts, it is estimated that Clean's gross margin in HALS products will be around 48% in FY25E, it added.

The company has roughly 10 products in its R&D. Some of them have been publicly announced, such as phenothiazine and other aniline derivatives. Besides this, the brokerage believes it could come up with several other phenol derivatives, among others.

JM Financial anticipates that even if Clean Science incurs a relatively small additional capex of 800 million in FY25E for these new products, it would at least be able to generate 1.4 billion in sales from them by FY28E.

“Over the period of FY25–28E, if we assume a consistent 66% gross margin in the existing business, 50% gross margin in the upcoming business, and a gradual ramp-up from 48% to 56% in the HALS business, we expect Clean's gross and EBITDA margins to stabilize at 60% and 40%, respectively.”

"Therefore, we anticipate Clean to show a 22%/20% CAGR of revenue and EBITDA over FY25–28E. Additionally, due to the lower tax rate, it could report a 25% EPS CAGR," said the brokerage.

Hence, the brokerage believes Clean would be able to make a clean strike by managing the margin contraction arising on account of HALS and new product additions.

Clean has been generating ample free cash flow, which gives it the wherewithal for inorganic acquisitions to support earnings growth, the brokerage noted.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

 

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First Published: 14 Apr 2023, 04:27 PM IST