Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Balrampur Chini Mills Ltd (BCML) to ‘CRISIL AA+/Stable’ from 'CRISIL AA/Positive’, The commercial paper has been reaffirmed at ‘CRISIL A1+’. Amount under the rated commercial paper has been reduced to Rs 900 crore from Rs 1,200 crore, following a request from the company, and in line with the policy of CRISIL Ratings on the same.

 

The rating action factors in the enhanced business risk profile, driven by growing diversity and better profitability from the distillery division, with ethanol produced being supplied at remunerative prices for blending with gasoline. Lower fluctuations in ethanol pricing, which is linked to price of sugarcane, has helped mitigate the volatility in business performance associated with sugar business. BCML has also announced further expansion in the distillery capacity for production of ethanol by 210 kilo litre per day (KLPD) in Balrampur (170 KLPD) and Gularia (40 KLPD), in addition to 320 KLPD announced to be added in Maizapur earlier. Thus, overall distillery capacity is likely to touch 1,050 KLPD by November 2022, from 520 KLPD as of September 2021. Consequently, the revenue share of the distillery segment will go up to about 25% and its share in profitability to about 60-70% by fiscal 2023, with margins for the segment remaining at 40-45%.

 

Operating margin has been steady in the sugar segment, aided by higher realisations (Rs 35/36 per kg at present, vis-à-vis Rs 31-33 per kg last year), and led by better demand-supply dynamics in the domestic market and an increase in exports. CRISIL Ratings expects sugar prices are expected to remain stable in fiscal 2022 as well, considering the diversion to ethanol, buoyant exports mitigating sizeable inventory build-up, and only a marginal rise in production. Also, despite a modest increase in the State Advised Price (SAP) for sugarcane in Uttar Pradesh (UP), profitability may not witness any material impact.

 

Revenue is likely to grow at a healthy pace over the medium term, as a result of enhanced distillery capacities, while the operating margin may lie in the range of 18-20%. Within the distillery segment as well, the company may focus on higher margin ethanol produced through the B-heavy molasses and cane juice route. Share of ethanol produced from this route is likely to remain above 80% from fiscal 2022 onwards, compared to 23% in fiscal 2020.

 

The financial risk profile is strong, supported by annual cash accrual of over Rs 700 crore. Capital expenditure (capex) of around Rs 1,000 crore is planned over the next couple of fiscals mainly towards the proposed 530 KLPD new distillery at Maizapur and expansion in Balrampur and Gularia, funded by debt of Rs 500 crore at an incentivised rate of interest of 5-5.5%. Debt metrics have improved over the years, led by healthy cash accrual, well-planned capex and reduction in debt levels; for instance, the total outside liabilities to adjusted networth (TOL/ANW) ratio is expected to improve sharply to nearly 0.7 time as on March 31, 2022, from almost 1.2 times as on March 31, 2019, and should remain comfortable over the medium term.  

 

The ratings reflect the dominant market position of BCML in North India, established relationships with farmers, diversified revenue profile, superior and improving operating efficiencies and a strong financial risk profile. These strengths are partially offset by susceptibility of business performance to cyclicality in the sugar business, and to regulatory changes such as movement in SAP of cane in UP or the minimum selling price (MSP) for sugar.

Analytical Approach

Using the capital allocation approach, CRISIL Ratings has arrived at the adjusted networth of BCML by knocking off the investment in Auxilo Finserve Pvt Ltd (‘CRISIL A/Stable/CRISIL A1’), wherein BCML holds a 45.05% stake. As on March 31, 2021, the investments were valued at Rs 157.5 crore

Key Rating Drivers & Detailed Description

Strengths:

Established market position and diversified revenue profile: 

BCML is a large integrated sugar producer in India. It has the capacity to crush 76,500 tonnes per day (TPD) of sugarcane, and exportable (surplus) power capacity of 165.2 MW and distillery of 520 KLPD. The company is the second largest player in terms of scale on a pan-India basis. It has ten sugar factories - eight in eastern UP and two in central UP, thus having access to a larger market in North India. The company expanded its distillery capacity by 160 KLPD, which became operational in January 2020. The capacity is being expanded from 520 KLPD to 1,050 KLPD through fresh addition of 320 KLPD and expansion of 210 KLPD, expected to be commissioned in November 2022. One of this distilleries will operate on dual feed i.e. sugarcane juice during the season and grains during the off-season, thereby ensuring utilization of the capacity throughout the fiscal, aiding the profitability. 

Fully integrated operations enable all supplementary businesses associated with sugar, such as distillery and power, to become major contributors to profitability, and largely de-risk the sugar business model. The distillery business offers much higher and stable profit and returns, compared with the sugar business, and thus, help moderate impact of cyclicality the inherent in the sugar business. Additionally, the initiatives by Government for increasing diversion of sugarcane to ethanol instead of sugar as well as encouragement for export of sugar has moderated the sugar business cyclicality to large extent and the same is expected to continue in future. Also, BCML is diverting more cane towards producing B-heavy molasses (share of ethanol through B-heavy route to remain above 70% of the overall volumes) which will lead to higher ethanol production. Owing to the same the dependence on exports will come down eventually. Moreover, the ethanol prices are function of sugarcane price and cost of production of sugar, thus there is little chances of the same being lowered. In addition, any increase in fair and remunerative price (FRP) of cane will lead to corresponding increase in ethanol price. Further, increased ethanol production and sacrifice of sugar will lead to improved working capital cycle.

CRISIL Ratings believes that the company will continue to benefit from its dominant market position in the sugar industry and diversified revenue streams will continue to offset the cyclicality in sugar business.

 

Superior and improving operating efficiencies: 

BCML's superior operating efficiencies emanate from its fully integrated nature of operations, increasing contribution to profitability from higher margin distillery segment, better sugar recovery rates and higher capacity utilisation leading to better absorption of fixed costs. The company's distillery as well as co-generation capacity is adequate to utilise all the molasses and bagasse produced through the crushing operations thereby resulting in fully integrated facilities.

The company has also been continuously engaging with farmers to produce early variety of cane, which has more sucrose content and hence, fetches higher sugar recovery rates. Increasing use of early variety of cane has helped recovery rates rise to 11% and beyond since fiscal 2019, vis-a-vis 9.5- 10% recorded over fiscals 2013 to 2015. High recovery rates can lower the cost of production considerably, making BCML's credit profile less susceptible to increase in cane prices or fall in sugar prices. Moreover, sugarcane yield per acre is also higher for early variety of cane, which will boost capacity utilisation of BCML and support performance in distillery and cogeneration businesses as well.

 

The overall operating profitability has been supported by the distillery segment, the share of which has seen grown substantially to 50% in fiscal 2021, from 14% in fiscal 2017, and is projected to reach 60-70% by fiscal 2023. Profitability is aided by the annual hike in ethanol pricing announced by the GoI over the last few years. Also, within distillery segment, the contribution from the higher margin B-Heavy route has been increasing. Share of the distillery segment in overall profitability has increased from 50%, and sustenance over 70% levels is a key rating driver.

 

Further, the company is able to derive benefits of economies of scale at each of its facilities, which is reflected in the lower than industry cost of production.

CRISIL Ratings believes that BCML's operating performance will continue to be supported by its superior efficiencies and fully integrated nature of operations.

Strong financial risk profile: 

Financial risk profile is characterized by low term debt and adequate debt protection metrics and liquidity. Absence of any significant debt-funded capex since fiscal 2008, and continuous debt repayment has helped reduce the long-term debt (outstanding at Rs 424 crore as on March 31, 2021). These term loans comprise soft loans under the state and central government schemes carrying a subsidized interest rate of 4-5%.

 

Over fiscals 2022 and 2023, BCML is expected to undertake capex of about Rs 1,000 crore, funded via a mix of debt and internal accrual. The company is expected to raise debt of Rs 500 crore in fiscal 2023. Despite this, overall debt metrics will remain strong, supported by healthy operating performance and significantly low-cost loans. Interest coverage and net cash accrual to debt ratio were healthy at 19.4 times and 0.44 time, respectively, for fiscal 2021, and are expected at over 18 times and around 0.60 time, respectively, for fiscal 2022. The TOL/ANW ratio, which was at 0.82 time as on March 31, 2021, should sustain at 0.6-0.7 time over the medium term. CRISIL believes that BCML's leverage levels will continue to be characterised by controlled debt. Any growth plans resulting in a sizeable long term debt will remain a key rating sensitivity factor.

 

The company has also been buying back its shares at regular intervals though amounts have not been material. Any significant outgo on account of buy-back of shares, material increase in dividend payout or capital reduction, will also be a monitorable.

 

Weakness:

Susceptibility of business performance to downturn in the sugar business

Sugar prices are largely market driven and dependent on production for the sugar season and inventory levels prevailing in the country. Hence, higher production, which increases inventory levels, may lead to a steep fall in prices and impact profitability severely, as the cost of production is relatively sticky in nature. Monsoons too have a bearing on cane production and recovery rate of cane, impacting overall sugar production in the country. The downfall in sugar prices is cushioned by the MSP declared by the GoI (Rs 31/kg at present).

 

Additionally, the government has taken measures to encourage increased diversion of sugarcane to ethanol instead of sugar, and promote exports so as to address the excess inventory situation and arrest the fall in prices. BCML may not be much impacted by sugar down-cycles, given its superior operating efficiencies, increasing contribution of the distillery segment and integrated nature of operations.

 

Exposure to regulatory changes in the sugar industry:

While sugar prices are market driven, the government is empowered to fix the price paid to cane growers annually. Sugarcane pricing is controlled through the SAP in UP, which is currently higher than the FRP (earlier the statutory minimum price). Though a higher SAP increases the cost of production for UP-based mills, greater use of early variety of cane, which are characterised by higher recovery rates, reduces the difference considerably for players such as BCML. Hence BCML's profitability, mainly of its sugar segment, remains vulnerable to material changes in the SAP and other regulatory changes in the sugar industry.

 

The GoI has showcased the intent to fasten the move to an ethanol-based economy, by advancing the 20% ethanol blending target (with gasoline) to 2025 from 2030. Additionally, the government has made supplies profitable by raising ethanol prices every fiscal, in addition to differential pricing for B-Heavy and the direct cane juice route, and providing interest sops on loans for setting up ethanol-based distilleries. Any change in the regulatory stance and continuation of government support to sugar sector (including distilleries and ethanol pricing) are key monitorables.

Liquidity: Strong

Liquidity is supported by a sanctioned fund based working capital limit of Rs 2,000 crore, which was utilised to the extent of 23% on an average during the 10 months ended September 30, 2021. The company has annual debt obligation of Rs 100-150 crore over fiscals 2022 and 2023, as against expected annual cash accrual of Rs 700 - 800 crore. Capex of around Rs 1,000 crore is planned for the next couple of fiscals. The company plans to fund around Rs 500 crore from banks under the interest subvention scheme of the GoI (at interest rate of ~5%) and the balance through internal accrual.

Outlook Stable

CRISIL Ratings believes BCML will continue to benefit from its established market position, superior operating efficiencies of the sugar business and increasing contribution from the more stable and higher-margin distillery business. Moreover, the financial risk profile should remain strong, with healthy debt metrics.

Rating Sensitivity Factors

Upward factors

• Substantial increase in cash accrual driven by improvement in business diversity and establishing market leadership across multiple segments
• Sustenance of strong financial risk profile and further improvement in debt metrics; TOL/ANW below 0.4-0.5 time on sustained basis
• Healthy build-up of cash surplus

 

Downward factors

• Sharp drop in sugar and distillery realisations impacting profitability, including any movement driven by changes in government regulations
• Large debt-funded capex or acquisition or material infusion into the NBFC associate (Auxilo), impacting financial risk profile and debt metrics; TOL/ANW in excess of 1.5-1.7 times

About the Company

BCML is one of the largest sugar producers in India. Operations are forward integrated, into manufacturing ethanol, using molasses' a by-product of sugar, and power, using cogeneration from bagasse, generated out of sugar manufacturing. The company has 10 sugar mills in UP with a combined capacity of 76,500 tonnes per day (TPD) of sugarcane, 520 KLPD of distillery and 165.2 MW of saleable cogeneration capacity. The Saraogi family, the promoters, held 42.42% of the equity capital ending October 2021 post the completion of the buyback.

 

Net profit was Rs 160 crore on net sales of Rs 2,354 crore for the six months ended September 30, 2020, against a net profit of Rs 210 crore on net sales of Rs 2720 crore for the corresponding period of the previous fiscal. 

Any other information: Not applicable