Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL A-/Stable/CRISIL A2+ ratings to the bank facilities of Fineotex Chemical Limited (FCL)

 

The ratings factor in the established position of the company in the textile 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 scale of operations.

 

FCL’s healthy business risk profile is driven by its strong market position in textile chemicals due to robust Research and Development (R&D) capabilities and increasing brand presence and network. Over the last five years, the company achieved a 15% growth in compounded terms with regular addition of capacities and established clientele in domestic as well as international markets spread over 69 countries. It offers more than 400 products. Over the medium term, growth will be driven by the addition of capacities in the new plant at Ambernath, Maharashtra; increasing wallet share among existing customers and changing customer preference leading to increased use of technical textiles.

 

Revenue is expected to grow 50-60% in fiscal 2022 driven by ramp up in new capacities and expected investment plan for expansion. Diversification into new segments in the last two years, namely drilling chemicals and home care and hygiene chemicals, to further support overall growth for the company. Healthy operating efficiency of FCL is expected to sustain with margins of 18-20% and return on capital employed (RoCE) of more than 20% over the medium term.

 

Financial risk profile is healthy supported by strong capital structure and moderate cash accrual. Gearing is expected to remain below 0.5 time in fiscal 2022 despite large capital expenditure (capex) for organic or inorganic expansion. FCL is expected to generate net cash accrual of Rs 50-70 crore per annum, which will be sufficient for debt repayment and incremental working capital requirement. Over the medium term, debt metrics are expected to remain comfortable with total outside liabilities to tangible networth (TOL/TNW) ratio below 0.7 time and interest coverage above 10 times. Liquidity should continue to be comfortable. Cash and equivalents were Rs 50-60 crore as on June 30, 2021.

 

Further, FCL is supported by a seasoned management with the ability to identify innovative solutions for client requirements. The experienced in-house R&D team has a track record of providing sound technical service to clients leading to long-term relationship with them.

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 textile chemicals market and reputed clientele:

The 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. Exports formed 57% of the revenue in fiscal 2021. 

 

The extensive product portfolio comprising more than 400 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+/FAAA/Stable/CRISIL A1+’), Himatsingka Seide Ltd (‘CRISIL A-/Negative/CRISIL A2+’) and Raymond Ltd (‘CRISIL AA-/CRISIL A1+/Watch Negative’) will continue to support the company's established market position. 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 15% compound annual growth rate over the last 5 years and is expected to remain healthy in the current fiscal with the addition of capacities. Over the medium term, other organic and inorganic investment plans will drive growth.

 

• Healthy operating efficiency

The capacities for the company are fungible across segments and products. This has resulted in better revenue generation on every unit of investment. Additionally, the investment required to put up additional capacities is low for the company and this has supported the strong RoCE at 21-22% and asset turnover of more than 5 times over the past few years. Operating efficiency is expected to remain healthy despite planned capacity expansion over the medium term with operating margin at 18-20% and RoCE above 20%.

 

• 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. Financial risk profile is expected to remain strong even with the debt company plans to take for funding the expected investment. Debt is expected to be at Rs 80-100 crore as on March 31, 2022 with gearing remaining below 0.4 time. Over the medium term, despite sizeable borrowings, debt protection metrics are expected to remain strong with healthy operating performance and expected interest coverage of more than 10 times.

 

Cash accrual, expected at Rs 50-70 crore per annum over the medium term, will be sufficient to take care of debt repayments and incremental working capital requirements. Any large debt funded capex or acquisition will remain a key monitorable.

 

Weaknesses

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

Raw materials are downstream 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 favourable product-mix, exposure to such volatility is mitigated. However, margins remained at 17.9-25.8% 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 scale of operations

Despite being in existence for over four decades, scale of operations remains moderate. Revenue growth has picked up in the past four years, driven by strong product portfolio and increasing network. Moreover textiles sector continues to form 95% of the revenue. Company has recently entered new sectors such as oil and gas and home care and hygiene. Growth in the new segments will remain a key monitoring factor. Additionally, timely execution of the investment plans will be critical for faster growth.

Liquidity: Adequate

In the absence of repayment obligation, cash accrual, expected at Rs 50 crore in fiscal 2022 (Rs 30 crore in fiscal 2021) will support liquidity. Fund-based limit remains moderately utilised at 25% in the 12 months ended April 2021. The capex, expected to be incurred by the company over the medium term, will be funded by a mix of debt and internal accrual. Cash accrual and unutilised 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, including from hygiene and health care products, and profitability in excess of 18-19%,  leading to net cash accrual of more than Rs 50 crore on a sustained basis
• Sustenance of healthy debt metrics
• Maintaining reasonable liquid surplus

 

Downward Factors:

• Weak business performance, impacting accrual
• Significant debt-funded capex or acquisitions or elongation of working capital cycle, impacting debt protection metrics for instance gearing increases to over 0.8 time

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 operations and Mr Surendra supervises overall affairs and is involved in strategic decisions.

 

The company manufactures over 400 specialty chemicals and enzymes to textile, garment, construction, leather, water treatment, agrochemicals, adhesives and others 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 into drilling chemicals and home care and hygiene segments.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Cash credit/overdraft facility	NA	NA	NA	16.00	NA	CRISIL A-/Stable
NA	Proposed long term bank loan facility	NA	NA	NA	40.00	NA	CRISIL A-/Stable
NA	Proposed short term bank loan facility	NA	NA	NA	42.00	NA	CRISIL A2+
NA	Letter of credit	NA	NA	NA	2.00	NA	CRISIL A2+