Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Fineotex Chemical Limited (FCL) to ‘CRISIL A/Stable/CRISIL A1’ from 'CRISIL A-/Stable/CRISIL A2+'. 

 

The upgrade factors in the improvement in the business risk profile of FCL as CRISIL Ratings expects ramp up of sales towards customers in home and hygiene category will significantly reduce its working capital cycle over medium term. The average debtors’ days for FCL have reduced from 120 days during fiscal 2022 to 90 days in first half of fiscal 2023. During the first half of fiscal 2023, the company recorded net cash accruals of Rs. 43 crores, higher by 98% as compared to corresponding period of last fiscal. The increase in cash accruals during April 2022 to September 2022 was contributed by increase in sales volumes (grew by 108% over corresponding period last fiscal). The revenue ratio between textile segment and home and hygiene segment was approximately 61:39 in half year fiscal 2023 (improved from 88:12 in fiscal 2022), CRISIL ratings believes that FCL will register net cash accruals of over Rs. 80 crores in fiscal 2023 and Rs. 90-100 crores in the next fiscal.

 

The operating income of the company grew by 90% in half year fiscal 2023, supported by volume growth of 108%. This volume growth in the company was majorly driven by volume growth in both textile and home and hygiene segment. The installed capacity of the company has increased to 1,04,000 TPA as of December 31, 2022, from 83,000 TPA as of June 30, 2022. CRISIL Ratings expects the company to register operating income growth of over 45% in fiscal 2023. The operating margin was at 19% for half year fiscal 2023, and the same is expected to improve to over 20% with better operating leverage in the next fiscal. The financial risk profile continues to remain strong characterized by expectation of extremely low dependence on debt in business and minimal utilization of bank facilities.

 

The rating factors in the established position of the company in the specialty chemicals segment with reputed clientele, healthy operating efficiency, strong financial risk profile and the extensive industry experience of its promoters. These strengths are partially offset by exposure to volatility in raw material prices and competition from multinational companies, and the moderate albeit improving scale of operations.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of FCL and its subsidiaries to the extent of its shareholding as they have significant managerial, operational, and financial linkages.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Established position in the specialty chemicals market and reputed clientele

With more than four decades of industry experience of the promoters, healthy relationship with reputed customers and suppliers and diversified product line and customer base should continue to support the business. Company has a good standing not only in the domestic market but has also increased its global footprint, with presence in around 70 countries. Exports formed 42% of the revenue in fiscal 2022. 

 

The extensive product portfolio comprising more than 450 products spanning textiles, homecare and hygiene and oil and gas sectors, along with robust clientele housing major domestic textiles players, such as Vardhman Textiles Ltd (‘CRISIL AA+/Stable/CRISIL A1+’), Himatsingka Seide Ltd (CRISIL BBB+/Negative/CRISIL A2) and Raymond Ltd (‘CRISIL AA-/Stable/CRISIL A1+’) will continue to support the company's established market position. FCL also has prestigious accreditations like Blue Design, ZDHC and Star Export House and certification by USEPA which helps them maintain their customer base. Overseas expansion, supported by the expertise of Biotex group (acquired by FCL in 2011) and complementary product portfolio, will drive export growth over the coming years.

 

Revenue posted a 21% compound annual growth rate over the last 5 years between fiscal 2018 to fiscal 2022 and is expected to remain healthy in the current and coming fiscals with the addition of capacities.

 

Healthy operating efficiency

The capacities for the company are fungible across segments and products. The company is moving towards a balanced end user profile from the past textile concentrated end user. The company earlier had a revenue ratio of around 88:12 of textile vs non textile segment, in half year fiscal 2023 the ratio was at 61:39 and the company aim to sustain the ratio going forward. In current fiscal, home and hygiene segment has enabled reduction in the debtors’ days from average of 120 days to 90 days, which has resulted in better accruals.

 

Additionally, the investment required to put up additional capacities is low for the company, and this has supported the strong RoCE of 29% and asset turnover of more than 5 times in fiscal 2022. Operating efficiency is expected to remain healthy with no major capacity expansion over the medium term with operating margin at 18-20% and RoCE above 25%.  

 

Strong financial risk profile

Over the past few years, debt free capital structure and healthy debt protection metrics have kept the financial risk profile healthy. The company is a term debt free company with gearing remaining below 0.1 time and expected to remain less than 0.5 times also going forward. Over the medium term, debt protection metrics are also expected to remain strong with healthy operating performance and interest coverage of more than 50 times.

 

Cash accrual, expected at Rs 80-100 crore per annum over the medium term, will be sufficient to take care of incremental working capital requirements. Any large debt funded capex or acquisition will remain a key monitorable in the company.

 

Weaknesses:

Exposure to volatility in raw material prices and to intense market competition

Raw materials are derivative of petrochemical products, and their prices are therefore exposed to volatility in crude oil and other raw material prices. Additionally, 20% of the raw material requirement is imported which is however offset by export earnings to cover the exchange fluctuation. Though with formula-based pricing and favorable product-mix, exposure to such volatility is mitigated. Also, with the cost pass through ability of the company, FCL has been able to maintain its operating margin at 17.9% to 21.3% over the last five years.

 

Further, there is intense competition in the high-end performance chemicals segment as players regularly introduce new products with enhanced capabilities or wider applications. Company faces strong competition from large European players, who are well established with high capital base and dominate the market.

 

Moderate albeit improving scale of operations

The company was incorporated in 2004, however, scale of operations remains moderate. Revenue growth has picked up in the past few quarters, driven by strong product portfolio, increasing network of more than 100 dealers in domestic as well as international market and foray into new business segment.

 

The scale of operations is expected to improve as the benefits of increased capacity are expected to flow in revenue and remains key monitorable.

Liquidity: Strong

In the absence of debt repayment obligation, cash accrual will support liquidity in the medium term. Accruals were at Rs 54 crore in fiscal 2022 and is expected to remain in the range of Rs 80 – Rs 100 crore going forward. Fund-based limit remains moderately utilized at 4% in the 6 months ended December 2022, resultant of low dependence on external fund based working capital due to higher accruals earned. Cash accrual and unutilized bank lines will be sufficient to meet incremental working capital requirements.

Outlook: Stable

CRISIL Ratings believes the business risk profile of FCL will benefit from ramping up of new capacities and improving performance of end-user segments. The financial risk profile will continue to be healthy, supported by steady cash accrual, and low debt.

Rating Sensitivity Factors

Upward Factors:

• Better-than-anticipated revenue growth, along with maintaining a favourable customer mix between textile and home and hygiene segment, and profitability more than 22-23%, leading to healthy cash accrual on a sustained basis
• Sustenance of healthy debt metrics
• Maintaining reasonable liquid surplus

 

Downward Factors:

• Weak business performance with fall in margins below 11-12%, impacting accruals
• Significant debt-funded capex or acquisitions or elongation of working capital cycle, impacting debt protection metrics
• Stretch in liquidity of the company

About the Company

Fineotex group was established in 1979 by Mr. Surendra Tibrewala. FCL is part of the group and was incorporated as a public limited company in 2007. The company got listed on the Bombay Stock Exchange in March 2011 and the National Stock Exchange in January 2015. Currently, Mr. Sanjay Tibrewala, son of Mr. Surendra, looks after the day-to-day operations and Mr. Surendra supervises overall affairs and is involved in strategic decisions. The company has 3 manufacturing facilities at present in Navi Mumbai (Maharashtra), Selangor (Malaysia) and Ambernath (Maharashtra).

 

The company manufactures over 450 specialty chemicals and enzymes to textile, garment, construction, leather, water treatment, agrochemicals, adhesives, and other industries. It is a leading manufacturer of specialty and performance chemicals for textiles. FCL manufactures and provides the entire range of products for pre-treatment, dyeing, printing, and finishing for textile processing to customers across the globe. Recently, over last 2 years, it has also entered drilling chemicals and home care and hygiene segments, with significant growth in sales volume of home care and hygiene in half year fiscal 2023.

Any other information: Not applicable

Annexure - Details of Instrument(s)

*Bank guarantee of Rs.4 Crs is sublimit of Cash Credit facility