| DCM Shriram Limited | ||
| Rating reaffirmed at 'CRISIL A1+ ' | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper of DCM Shriram Ltd (DCM).
Operating performance of DCM improved in fiscal 2022, as operating revenue increased by 19% aided by healthy performance across business segments. The chloro-vinyl segment was the key contributor to revenue growth, driven by increase in realisations. The other segments like Shriram Farm Solutions and Fenesta also performed well and mitigated the impact of write-offs in the bioseed business and compression in the sugar business owing to lower volumes, especially exports, and lower availability of molasses. The operating margin rose to 18.6% in fiscal 2022 from 13.7% in fiscal 2021 owing to better profitability from the chloro-vinyl segment; profits generated from other segments remained stable. Operating margin may moderate from the highs of fiscal 2022, as the prices of chloro-vinyl are correcting, yet expected to remain healthy over the medium term.
The company is undergoing a capital expenditure (capex) of around Rs 3500 crores currently, out of which majority (~Rs 2800 crores) of the capex will be done by March 2023, while balance will be incurred in first half of fiscal 2024. The capex is to be funded by a debt of around Rs 800-1,000 crores. Financial risk profile should remain strong, despite the ongoing debt-funded capex, supported by expected steady cash accrual and healthy liquidity. Any significant delay in commissioning or higher-than-expected capex or delayed benefits expected from the ongoing capex will remain key monitorable.
The rating continues to reflect healthy and diversified business risk profile and strong financial risk profile of DCM, indicated by comfortable debt protection metrics, healthy capital structure and ample liquidity. These strengths are partially offset by risks related to volatility in the sugar, chlor-alkali and plastics segments and exposure to risks related to regulatory changes in the sugar and fertiliser industries. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of DCM and its associate and subsidiary companies considering the operational, managerial, and financial linkages between them.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths
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 second-largest domestic manufacturer of caustic soda, with capacity of 1,845 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 plans to increase capacity and 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 38,000 tonne of cane crushed per day. Further, its 350-kilo litre per day distillery capacity and 87.5 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. Rationalisation of product portfolio in SFS and sale of international seed operations in two territories also strengthen the business performance.
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 21.0 time and 0.7 time, respectively, for fiscal 2022. Prudent funding of capacity expansion kept gearing below 1 time over the eight fiscals ended March 31, 2022. Capital structure should remain comfortable over the medium term despite scheduled capex of around Rs 3,500 crore in the next two years, to be funded via mix of debt and cash accrual. Any large, debt-funded capex or acquisition that weakens the financial risk profile will be a monitorable.
Weaknesses
Profitability in the chlor-alkali and plastics businesses remains susceptible to international prices, exchange rate fluctuations, import duty levels and crude oil prices.
Prices of caustic soda declined steeply in fiscal 2021 and first half of fiscal 2022 due to excess supply because of the recently commissioned capacities and lower demand from the end-user industry due to prevailing pandemic Covid 19. However, in the second half of fiscal 2022, prices showed a sharp upturn due to middle eastern suppliers facing downtime, elevated energy prices for the European manufacturers and healthy demand from opening of markets post the Covid-19 pandemic. However, the price of caustic soda is expected to moderate in fiscal 2023.
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.
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 7% 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. Cash accrual is projected at Rs 900-1,300 crore per annum, against yearly debt obligation of Rs 140-200 crore over the medium term. Bank limits worth Rs 850 crore were largely unutilised for the 12 months through June 2022. Cash and equivalents were about Rs 1,600 crore as on March 31, 2022.
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
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. |
Rating Sensitivity factors Downward factors
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About the Company DCM is a diversified business group, with presence across the chloro-vinyl (chlor-alkali and plastics), sugar and agricultural inputs (farm solutions; urea and bioseed) businesses. The company is also engaged in Fenesta building system and cement. It operates its chlor-alkali, plastics, urea, and cement businesses from Kota and chlor-alkali operations from Bharuch, where it has captive power plants. The company has four sugar mills in central Uttar Pradesh, with a bioseed division in Hyderabad.
For the three months ended June 30, 2022, net profit was Rs 254 crore on income of Rs 2,851 crore, compared with Rs 158 crore and Rs 1,957 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
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Annexure – List of entities consolidated
*subsidiary w.e.f. Oct 19, 2021 **The Scheme of amalgamation for merger of Bioseed Limited with Shriram Bioseed Ventures Ltd has been approved by National Company Law Tribunal (NCLT) vide its order dated March 29, 2022, which became effective on April 27, 2022, on filing the certified copy of orders of NCLT in the office of Registrar of Companies |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
Criteria Details
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