Key Rating Drivers & Detailed Description

Strengths:

Healthy and diversified business risk profile

Chlor-alkali (caustic soda and chlorine) manufacturing is a part of the chloro-vinyl segment (chlor-alkali and plastics) along with polyvinyl chloride resins. The company is the third-largest domestic manufacturer of caustic soda, with capacity of 1,869 tonne per day at plants in Kota, Rajasthan, and Bharuch, Gujarat. Sustained price realisation, lower power cost driven by better efficiencies of captive power plants and large-scale operations ensured healthy operating margin over the past decade. Given its increased capacity and ability to generate large economies of scale, the company is expected to maintain its market position and operating efficiency over the medium term.

DCM owns and operates four sugar mills in Uttar Pradesh, with capacity of 41,000 tonne of cane crushed per day. Further, its 560-kilo litre per day distillery capacity and 94.5 MW of exportable power, is expected to support segmental profitability and partially insulate the company from cyclicality in the sector. The government’s efforts to maintain sugar inventory balance in the country, thereby supporting exports and increasing the percentage of ethanol blending with petrol, should ensure stable profitability over the medium term.

The business risk profile also benefits from the company’s small-but-diversified presence across agricultural-related businesses (including Shriram Farm Solutions [SFS], fertiliser, bioseed, and Hariyali Kisan Bazaar), cement and Fenesta windows.

Strong financial risk profile

The financial risk profile is supported by comfortable debt protection metrics and healthy capital structure. Sustained profitability ensured comfortable interest coverage and net cash accrual to total debt ratios of over 30.0 time and 0.7 time, respectively, for fiscal 2023. Prudent funding of capacity expansion kept gearing below 1 time over the eight fiscals ended March 31, 2023. Capital structure should remain comfortable over the medium term despite debt funded capex. Any large, debt-funded capex or acquisition that weakens the financial risk profile will be monitorable.

Weaknesses:

Volatility in the sugar, chlor-alkali, and plastics businesses

Profitability in the chlor-alkali and plastics businesses remains susceptible to international prices, exchange rate fluctuations, import duty levels and crude oil prices.

In the chemical segment, prices of caustic soda have corrected significantly from Q3 fiscal 2023 onwards impacted by global slowdown affecting end user industries and significant capacity additions in the industry. In the Vinyl segment, profitability was impacted due to steep decline in prices of PVC resins in fiscal 2023 and dumping of resins by foreign players in the Indian market due to slowdown in global demand. The prices are expected to remain subdued in fiscal 2024 impacting the overall profitability of the company. However, profitability is expected to improve from Q3 fiscal 2024 onwards with improvement in cost structures. The recovery in prices would remain a key monitorable for the re stabilisation of realisations at DCM.

Sugar prices are largely market driven and are dependent on production for the sugar season and inventory levels prevailing in the country. Hence, higher production that 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. This downfall in sugar prices is cushioned by the measure of Central Government through fixation of minimum support price (MSP) of sugar, increased ethanol prices and continued focus on increasing sugar diversion for ethanol production from the distillery operations.

Exposure to regulatory risks

The sugar and fertiliser businesses are highly regulated. In sugar, the Government of India is empowered to fix the price paid to cane growers annually (Fair and Remunerative Price, or F&RP; earlier, it was called the statutory MSP). In some states, such as Uttar Pradesh, sugarcane pricing is controlled through the State Advised Price (SAP). A large gap between SAP and F&RP can expose Uttar Pradesh-based mills to the threat of imports from other states, though at present, this difference is small. Furthermore, a high SAP drives up the cost of production, which these mills have been able to partially offset through the use of better cane variety, thereby improving their cane recovery rate. The government also announces an MSP for sugar every year, which supports the realisation of sugar. Furthermore, the government’s focus on increasing ethanol blending with petrol to 20% from the current 10% led to high demand for ethanol, leading to stable performance of the sugar business.

In fertiliser, both the input and output prices are controlled by the government.

Liquidity: Strong

Liquidity should remain healthy despite the ongoing capex. A prudent liquidity policy helps offset fluctuation in cash flow. CRISIL Ratings expects cash accrual to be Rs 700-1,200 crore per annum, against yearly debt obligation of Rs 170-190 crore over the medium term. Utilisation of bank limits worth Rs 1,100 crore remained low for the 12 months through April 2023. Cash and equivalents were about Rs 651 crore as on June 30, 2023.

Environment, social and governance (ESG) profile

The ESG profile of DCM supports its strong credit risk profile.

The chemical manufacturers can have a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas emissions. The sector’s social impact is characterised by health hazards, leading to higher focus on employee safety and wellbeing and the impact on local community, given the nature of its operations. DCM has continuously focused on mitigating its environmental and social risks.

Key ESG highlights

• The company monitors its water, energy, and waste targets. Company has been able to reduce specific water intensity by 25%, in specific Energy intensity by 29% and in Specific GHG Emissions intensity by 23% from 2022 to 2023.
• The Company stands committed to increase the mix of green energy in its overall consumption of different energy sources. ~42% of the total direct power consumption is green power.. Company is 12 times water positive.
• The attrition rate was at 15.18% at par with peers and the company has also been able to reduce its % share of employees in union to 16.77% from 70%. To identify potential risks, DCM has a human rights due diligence process which is conducted annually through DCM Shriram's internal audit process for monitoring company-wide compliance.
• The governance structure is characterised by 50% of the board comprising independent directors, presence of an investor grievance redressal mechanism and extensive disclosures.

There is growing importance of ESG among investors and lenders. The commitment of DCM to the ESG principle will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Key Financial Indicators

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper/magazine/agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites and portals.

About CRISIL Ratings Limited (A subsidiary of CRISIL Limited, an S&P Global Company)

CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as bank loans, certificates of deposit, commercial paper, non-convertible/convertible/partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including ratings for municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
 
CRISIL Ratings Limited ('CRISIL Ratings') is a wholly-owned subsidiary of CRISIL Limited ('CRISIL'). CRISIL Ratings Limited is registered in India as a credit rating agency with the Securities and Exchange Board of India ("SEBI").
 
For more information, visit www.crisilratings.com 
 

About CRISIL Limited

CRISIL is a leading, agile and innovative global analytics company driven by its mission of making markets function better. 

It is India’s foremost provider of ratings, data, research, analytics and solutions with a strong track record of growth, culture of innovation, and global footprint.

It has delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers through businesses that operate from India, the US, the UK, Argentina, Poland, China, Hong Kong and Singapore.

It is majority owned by S&P Global Inc, a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

For more information, visit www.crisil.com

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

CRISIL PRIVACY NOTICE
 
CRISIL respects your privacy. We may use your contact information, such as your name, address and email id to fulfil your request and service your account and to provide you with additional information from CRISIL. For further information on CRISIL's privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer is part of and applies to each credit rating report and/or credit rating rationale ('report') that is provided by CRISIL Ratings Limited ('CRISIL Ratings'). To avoid doubt, the term 'report' includes the information, ratings and other content forming part of the report. The report is intended for the jurisdiction of India only. This report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the report is to be construed as CRISIL Ratings providing or intending to provide any services in jurisdictions where CRISIL Ratings does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this report does not create a client relationship between CRISIL Ratings and the user.

We are not aware that any user intends to rely on the report or of the manner in which a user intends to use the report. In preparing our report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the report is not intended to and does not constitute an investment advice. The report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind to enter into any deal or transaction with the entity to which the report pertains. The report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Ratings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold or sell any securities/instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL Ratings assumes no obligation to update its opinions following publication in any form or format although CRISIL Ratings may disseminate its opinions and analysis. The rating contained in the report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the report should rely on their own judgment and take their own professional advice before acting on the report in any way. CRISIL Ratings or its associates may have other commercial transactions with the entity to which the report pertains.

Neither CRISIL Ratings nor its affiliates, third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively, 'CRISIL Ratings Parties') guarantee the accuracy, completeness or adequacy of the report, and no CRISIL Ratings Party shall have any liability for any errors, omissions or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the report. EACH CRISIL RATINGS PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Ratings Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. Public ratings and analysis by CRISIL Ratings, as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any), are made available on its website, www.crisilratings.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee - more details about ratings by CRISIL Ratings are available here: www.crisilratings.com.

CRISIL Ratings and its affiliates do not act as a fiduciary. While CRISIL Ratings has obtained information from sources it believes to be reliable, CRISIL Ratings does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and/or relies on in its reports. CRISIL Ratings has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL Ratings has in place a ratings code of conduct and policies for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html.

Rating criteria by CRISIL Ratings are generally available without charge to the public on the CRISIL Ratings public website, www.crisilratings.com. For latest rating information on any instrument of any company rated by CRISIL Ratings, you may contact the CRISIL Ratings desk at crisilratingdesk@crisil.com, or at (0091) 1800 267 1301.

This report should not be reproduced or redistributed to any other person or in any form without prior written consent from CRISIL Ratings.

All rights reserved @ CRISIL Ratings Limited. CRISIL Ratings is a wholly owned subsidiary of CRISIL Limited.
 

CRISIL Ratings uses the prefix 'PP-MLD' for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011, to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL Ratings' use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: https://www.crisil.com/en/home/our-businesses/ratings/credit-ratings-scale.html