Rating Rationale
April 18, 2019 | Mumbai
Balrampur Chini Mills Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.2440.63 Crore (Enhanced from Rs.2283.3 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
 
Rs.1200 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings to the bank loan facilities and commercial paper programme of Balrampur Chini Mills Limited (BCML).

For nine months ended 31st December 2018, the company posted operating income of Rs 2958 crore and operating margin of 14.5% as against Rs 3317 crore and 13.9% in similar period in fiscal 2018. The improvement in operating margin was mainly driven by strong performance in distillery segment, mainly driven by higher realisation and volumes of ethanol in distillery division. The profitability of distillery segment is expected to remain healthy over medium term due to the increase in ethanol prices announced by Government of India in fiscal 2019. The cogeneration division posted improved performance with 29% growth in units sold with around 3% growth in realisations year on year (y-o-y). The profitability of Sugar division was impacted in 2019 y-o-y due to lower realisation in sugar with average realisation in sugar at Rs 30.8 per kilogram for nine months ended 31st December 2018 as against Rs 36.8 per kilogram during similar period last fiscal, while the sales in terms of volume was stable. In February 2019, the Government of India announced increase in minimum selling price of Sugar to Rs 31 per kilo gram which will improve the performance of Sugar division in the near term. This will benefit the profitability of the sugar division in the current sugar season. Any change in regulatory stance and continuation of government support to sugar sector will remain key monitorable in the medium term.
 
The financial risk profile continues to be healthy. The company is expected to generate cash accruals of Rs 350-400 crore per annum over medium term as against the expected repayments of Rs 60-80 crore per annum. The company is planning to incur capex of Rs 210 crore for increasing its distillery capacity apart from routine capex of Rs 80-90 crore per annum, the capex will be funded partially from debt and internal accruals. Liquidity profile is strong reflected in average bank limit utilization of 30% over past twelve months ended January 2019. Over medium term, with continued expectation of healthy profitability, the financial profile is expected to continue to be healthy.

The ratings reflect the company's dominant market position in northern India, established relationship with farmers, diversified revenue profile, superior and improving operating efficiencies and comfortable financial risk profile. These strengths are partially offset by susceptibility of its business performance to cyclicality in the sugar business and to regulatory changes such as change in state advised price (SAP) of cane in Uttar Pradesh (UP).

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 tonne per day (TPD) of sugarcane, and exportable (surplus) power capacity of 163 MW and distillery of 360 kilo litre per day (KLPD). BCML 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 and being present in UP, has access to a larger market. The company is undertaking expansion in distillery capacity by 160 KLPD which is expected to commence operations by January 2020.

Moreover, fully integrated operations enable all supplementary businesses associated with sugar, such as power and distillery, to become major contributors to profitability, and partially de-risk the sugar business model. Power and distillery businesses offer higher and stable profits and returns, compared with the sugar business, and thus, help moderate impact of cyclicality inherent in the sugar business.

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

* Superior and improving operating efficiencies: 
BCML's superior operating efficiencies emanate from its fully integrated nature of operations, better sugar recovery rates and higher capacity utilisation leading to better absorption of fixed costs. The company's cogeneration as well as distillery capacity is adequate to utilise all the bagasse and molasses produced through the crushing operations thereby resulting in fully integrated facilities.

Also, the company has been continuously engaging with the farmers to produce early variety of cane which has higher sucrose content and resultantly higher sugar recovery rates. Increasing use of early variety of cane is expected to result in an improvement in sugar recovery rates from 9.5% to 10% witnessed over fiscal 2013 to fiscal 2015 to 11% and beyond in fiscal 2018 and fiscal 2019. Higher recovery rates can lower 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 the performance in cogeneration and distillery businesses as well.

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

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

*Comfortable financial risk profile: 
The company's financial risk profile is characterised by low term debt, strong debt protection metrics and healthy liquidity. Absence of any significant debt funded capex since fiscal 2008 and continuous debt repayment has resulted in a decline in the term debt levels of the company to Rs 124 crore as on March 31, 2018. The term debt is expected to increase to Rs 370 crore in fiscal 2019 due to availment of soft loan amounting to Rs 365 crore from Government of Uttar Pradesh in November 2018. The company is also planning to increase the distillery capacity to 520 kilo litre per day (KLPD) from present 360 KLPD by January 2020 with capex of Rs 210 crore, partially funded via debt.

Further, healthy operating performance and controlled debt coupled with significantly low interest rate on these loans supports the overall debt protection metrics of the company. The company had an interest coverage ratio and net cash accruals to debt ratio of 6.77 times and 0.26 times respectively for fiscal 2018. The debt protection metrics is expected to continue to be healthy over medium term.

CRISIL believes that BCML's capital structure will continue to be characterised by controlled debt. Any growth plans resulting in a sizeable term debt will remain a key rating sensitivity factor.

Weakness
Susceptibility of business performance to downturn in the sugar business: 
Sugar prices are largely market driven and are dependent on production for the sugar season (October 1 to September 30) and inventory levels prevailing in the country. Hence, higher production which adds to the sugar inventory levels may lead to steep fall in prices and impact profitability severely given that the cost of production is relatively sticky in nature. Dependence on monsoons have also rendered the sugar industry cyclical as monsoons have a bearing on cane production and recovery rate of cane impacting the sugar production in the country. This downfall in sugar prices is cushioned by the measure of Central Government through fixation of Minimum Support Price of Sugar which at present is Rs. 31/kg.

However, government has taken measures in the past to promote exports in order to address the excess inventory situation in the country and arrest the fall in prices. Though the impact of sugar down-cycles is expected to be lower on BCML given its superior operating efficiencies and integrated nature of operations, this will continue to render profitability indicators volatile.

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 Fair and Remunerative Price (F&RP; earlier the statutory minimum price). Though a higher SAP results in a higher cost of production for UP based mills, increasing use of early variety of cane which are characterised by higher recovery rates reduces the difference considerably for players such as BCML. While, the UP government introduced cane subsidy in sugar season 2015 and sugar season 2016, based on certain conditions, this was only able to partly offset the impact of a steep fall in prices of sugar.

Hence BCML's profitability remains vulnerable to changes in the SAP and other regulatory changes in the sugar industry.
Liquidity

Liquidity is supported by sanctioned fund based working capital limit of Rs 2073 crore which was utilized to the extent of 30% on an average during last 12 months ended January 2019. The company has repayments of Rs. 60-80 cr over Fiscal 2020 to 2022 as against expected cash accrual of Rs. 350 - 400 crore. Additionally the company had cash and equivalents of Rs 58 crore as on February 2019. The company is planning to incur capex of Rs 210 crore for increasing its distillery capacity apart from routine capex of Rs 80-90 crore per annum, the capex will be funded partially from debt and internal accruals.

Outlook: Stable

CRISIL believes BCML will continue to benefit from its established market position and superior operating efficiencies in the sugar business. Moreover, the company's financial risk profile is expected to remain comfortable.

Upside Scenario
* Reduction in variability of profits as a result of further improvement in cost efficiencies or structural changes in sugar industry
*Improvement in diversity with increase in proportion of distillery with stable and higher profitability, for instance, contribution from ethanol improving to 25-30% of revenue on sustained basis
*Sustenance of comfortable financial risk marked by minimal term debt.

Downside Scenario
* The company undertakes large debt funded capital expenditure or acquisition impacting the company's financial risk profile or if there is a sharp fall in profitability.

About the Company

BCML is one of the largest sugar producers in India. The operations of the company are forward integrated, manufacturing ethanol, using molasses' a by-product of sugar, and power, using cogeneration from bagasse, waste generated out of sugar manufacturing. Its facilities consist of ten sugar mills in Uttar Pradesh with a combined capacity of 76,500 tonnes per day (TPD) of sugarcane, 360 kilo litres per day (KLPD) of distillery and 163.2 megawatt [MW] of saleable cogeneration capacity. The Saraogi family, the promoters, holds 40.98% of the company's equity capital as on December 31, 2018.

Net profit was Rs 285 crore on net sales of Rs 2,958 crore for the nine months ended December 31, 2018, against a net profit of Rs 263 crore on net sales of Rs 3,375 crore for the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated) - CRISIL adjusted numbers
As on/for the period ended March 31 Unit  2018 2017
Revenue Rs crore 4483 3425
Profit after tax (PAT) Rs crore 232 593
PAT Margin % 5.2 17.3
Adjusted debt/Adjusted networth Times 0.61 1.14
Interest coverage Times 6.77 10.04

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs. Cr) Rating Assigned with Outlook
NA Commercial Paper NA NA 7-365 days 1200 CRISIL A1+
NA Long term loan NA NA June 2024 387.63 CRISIL AA/Stable
NA Cash Credit^ NA NA NA 1703 CRISIL AA/Stable
NA Cash Credit$ NA NA NA 200 CRISIL AA/Stable
NA Cash Credit** NA NA NA 150 CRISIL AA/Stable
^interchangeable with non-fund based facility of Rs 50 crore
**interchangeable with non-fund based facility of Rs 15 crore
$interchangeable with non-fund based facility of Rs 40 crore
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1200.00  CRISIL A1+  29-03-19  CRISIL A1+  06-03-18  CRISIL A1+  26-05-17  CRISIL A1+    --  -- 
Fund-based Bank Facilities  LT/ST  2440.63  CRISIL AA/Stable  29-03-19  CRISIL AA/Stable  06-03-18  CRISIL AA/Stable  26-05-17  CRISIL AA/Stable    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit$ 200 CRISIL AA/Stable Cash Credit$ 200 CRISIL AA/Stable
Cash Credit^ 1703 CRISIL AA/Stable Cash Credit^ 1703 CRISIL AA/Stable
Cash Credit** 150 CRISIL AA/Stable Cash Credit** 150 CRISIL AA/Stable
Long Term Loan 387.63 CRISIL AA/Stable Long Term Loan 230.3 CRISIL AA/Stable
Total 2440.63 -- Total 2283.3 --
^interchangeable with non-fund based facility of Rs 50 crore
**interchangeable with non-fund based facility of Rs 15 crore
$interchangeable with non-fund based facility of Rs 40 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Sugar Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt
Understanding CRISILs Ratings and Rating Scales

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