Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A/Stable/CRISIL A1' ratings on the bank facilities of Fineotex Chemical Limited and subsequently withdrawn the ratings at the company's request and on receipt of a no-objection certificate from the lenders. The withdrawal is in line with CRISIL Ratings’ policy on withdrawal of bank loan ratings.

 

The reaffirmation of the ratings reflects strong performance driven by 40% growth in operating income supported by volume growth of ~85% in fiscal 2023 as compared to fiscal 2022. This volume growth was majorly driven by volume growth in both textile and home and hygiene segments. 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. The operating margin was at 22% for fiscal 2023 as compared to 20% in fiscal 2022. 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 relationships with reputed customers and suppliers and diversified product line and customer base should continue to support the business. The company has a good standing not only in the domestic market but has also increased its global footprint, with a presence in around 70 countries.

 

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-/Watch Positive/ CRISIL AA-/ Watch Developing/ 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 23% compound annual growth rate over the last 5 years between fiscal 2019 to fiscal 2023 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 the current fiscal, home and hygiene segment has enabled reduction in the debtors’ days from average of 110 days to 70 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 37% and GCA days of 159 as compared to 30% and 215 days in previous fiscal. Operating efficiency is expected to remain healthy with no major capacity expansion over the medium term with operating margin at 18-22% 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 100 times.

 

Cash accrual, expected at Rs 85-120 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 derivatives 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 21.8% 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. The company faces strong competition from large European players, who are well established with a high capital base and dominate the market.

 

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

 

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 89 crore in fiscal 2023 and is expected to remain in the range of Rs 85 – Rs 120 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 the 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 25%, 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 fiscal 2023.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit/overdraft facility	NA	NA	NA	30	NA	CRISIL A/Stable (Rating Reaffirmed and Withdrawn)
NA	Proposed long term bank loan facility	NA	NA	NA	18	NA	CRISIL A/Stable (Rating Reaffirmed and Withdrawn)
NA	Proposed short term bank loan facility	NA	NA	NA	39	NA	CRISIL A1 (Rating Reaffirmed and Withdrawn)
NA	Letter of credit	NA	NA	NA	3	NA	CRISIL A1 (Rating Reaffirmed and Withdrawn)
NA	Letter of credit and  Bank Guarantee*	NA	NA	NA	8	NA	CRISIL A1 (Rating Reaffirmed and Withdrawn)
NA	Foreign Exchange Forward	NA	NA	NA	2	NA	CRISIL A1 (Rating Reaffirmed and Withdrawn)

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