Rating Rationale

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. 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.

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, higher than average sugar recovery rates in UP 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 Rs143.3 crores as on December 31, 2017. The company's term debt is expected to continue to be low given that the company does not have any significant capex and inorganic growth plans.

Further, healthy operating performance low term debt levels 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 10 times and 0.33 times respectively for fiscal 2017. The debt protection metrics is expected to continue to be healthy even in times of sugar downcycle because of minimal interest on term debt.

High cash accruals against moderate capital expenditure and debt repayments resulted in high liquidity for BCML in fiscal 2018.

CRISIL believes that BCML's capital structure will continue to be characterised by low term debt. Therefore any inorganic 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.

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.