CRISIL upgrades rating of Finotex Chemical

CRISIL upgrades rating of Finotex Chemical

Long Term Rating CRISIL A/Stable (upgraded from CRISIL A-/Stable) and Short Term Rating CRISIL A1 (upgraded from CRISIL A2+)

  • By ICN Bureau | January 29, 2023

Fineotex Chemical Limited, a leader of speciality chemicals headquartered in Mumbai, is proud to announce Long Term Rating CRISIL A/Stable (upgraded from CRISIL A-/Stable) and Short Term Rating CRISIL A1 (upgraded from CRISIL A2+).

In its report dated 27th January 2023, CRISIL while giving the rating rationale said, “The upgrade takes into account the improved business risk profile of Fineotex Chemical Limited’s (FCL) as sales towards customers in home and hygiene category are expected to significantly reduce its working capital cycle over the medium term. The financial risk profile remains strong with low dependence on debt and minimal use of bank facilities. The rating reflects the company's established position in the specialty chemicals segment with reputable clients, strong operating efficiency, financial risk profile, and experienced promoters. These strengths are offset by exposure to raw material price volatility, competition from multinational companies and moderate scale of operations, which is however improving.”

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.

On a cautionary note, the report said, “Raw materials derived from petrochemical products are exposed to volatility in crude oil and other raw material prices. Volatility in prices of the imports is largely mitigated by formula-based pricing and a favorable product mix. The exchange fluctuation is also offset by export earnings. Intense competition in the high-end performance chemicals segment from large European players, who are well established with a high capital base and dominate the market, is a key concern.”

While commenting on company’s strengths, the report is states that the company has a strong reputation, with more than four decades of industry experience by the promoters, a healthy relationship with customers and suppliers, a diversified product line, customer base, favorable exports, and prestigious accreditations .and this will continue to support its established market position. The acquisition of Biotex group in 2011 will also drive export growth through overseas expansion and complementary product portfolio.

The company is moving away from a textile-concentrated approach with a broad product profile catering to multiple industries and. The company aims to continuously monitor and maintain a well-balanced revenue ratio for textile vs non- textile segments. The company's debtors' days have also improved to an average of 90 days, resulting in better accruals. The low investment required for additional capacities has supported strong returns on capital employed (RoCE) and asset turnover in fiscal 2022. Operating efficiency is expected to remain healthy with no major capacity expansion planned in the medium term, with healthy operating margin and RoCE.

The company has, over the past few years, retained a debt-free capital structure and strong debt protection metrics which have kept its financial risk profile low. The company is term-debt free with gearing remaining below 0.1 times and expected to stay below 0.5 times in the future. 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.

“The company has no debt repayment obligation and cash accrual will support liquidity in the medium term. The company has low dependence on external funding for working capital due to high accruals earned, and cash accrual & unutilized bank lines will be sufficient to meet incremental working capital requirements,” said CRISIL. 

“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,” added CRISIL.

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