Rating Rationale
December 28, 2017 | Mumbai
DCM Shriram Limited
'CRISIL A1+' assigned to CP 
 
Rating Action
Rs.800 Crore Commercial Paper CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A1+' rating to the commercial paper of DCM Shriram Limited. The rating reflects the healthy and diversified business risk profile, underscored by strong operating efficiencies in the chlor-alkali segment and a healthy profitability in the sugar segment. The rating also factors in the strong financial risk profile, marked by comfortable debt metrics, healthy capital structure and ample liquidity, supported by unutilised bank limits. 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

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of DCM Shriram Ltd and its associate and subsidiary companies, considering the operational, managerial, financial linkages between them.

Key Rating Drivers & Detailed Description
Strengths
* Healthy and diversified business risk profile driven by strong operating efficiencies in chlor-alkali segment and healthy profitability in sugar segment:
Chlor alkali (caustic soda and chlorine) manufacturing is a part of the chlor-vinyl segment of DCM Shriram Ltd, along with poly-vinyl chloride (PVC) resins. The company is amongst the top three domestic manufacturers of caustic soda, with a total capacity of 1,343 tons per day (tpd) situated at Kota (Rajasthan) and Bharuch (Gujarat). Both these capacities have been operating at 90-100% capacity utilisation. Sustained price realisations, controlled power cost due to captive power plants, and large scale of operations, have ensured a healthy operating margin over the past decade. Given the plans to augment capacity, and the large economies of scale, the company will maintain its market position and operating efficiency over the medium term. Further, company's ongoing plans to increase chlorine consumption through downstream projects will also support the operating margins going forward.
 
Steady prices, higher cane production in Uttar Pradesh (UP), leading to more than 90% capacity utilisation in the sugar season, and improving recovery rates have made the sugar business more profitable in fiscal 2017. The ongoing capital expenditure (capex) to add 150 kilo litres per day (KLD) distillery unit by January 2018, will give the benefit of full-integration, thus providing some stability to the margins going forward. Given the cyclicality of the business, while profitability will moderate, it should remain healthy over the near term.
 
The overall business risk profile also benefits from the small, albeit diversified presence across agri related businesses (including Shriram Farm Solutions, Fertiliser, Bioseeds and Hariyali Kisan Bazaar), cement and Fenesta windows.
 
* Strong financial risk profile:
Financial risk profile is underpinned by comfortable debt protection metrics, healthy capital structure and ample liquidity. Sustained profitability has improved interest cover and net cash accrual to total debt (NCATD) ratios to 11.0 times and 0.5 time, respectively, in fiscal 2017, from 6.1 times and 0.3 time in fiscal 2016. Prudent funding of capacity expansions undertaken so far, has kept gearing below 1 time for the four years ended March 31, 2017. Capital structure should remain comfortable even going forward, as bulk of the scheduled capex will be funded through internal accrual. Liquidity is comfortable with cash and cash equivalents of Rs 225 crore as on March 31, 2017, and large unutilised bank limit (average utilisation of Rs 870 crore of fund-based limit, at 30% over 12 months through October 2017). CRISIL will continue to monitor any larger than expected debt-funded capital expenditure (capex) or acquisition, which may adversely impact financial risk profile.
 
Weaknesses
* Volatility in sugar, chlor alkali and plastics business
Sugar prices are largely market driven, and dependent on production during the sugar season (October 1 to April 30) and prevalent inventory levels. Higher production, which adds to the sugar inventory, may lead to a steep fall in prices, and impact profitability severely, as cost of production is relatively stickier. Dependence on monsoons has also made the sugar industry cyclical, as monsoons have a bearing on cane production and recovery rate of cane, thus impacting domestic sugar production. Chlor alkali and plastics business is also susceptible to exchange rate fluctuations, import duty levels and crude oil price movements and may impact the profitability in these segments.
 
* Exposure to risks related to regulatory nature of sugar and fertiliser industries:
Both sugar and fertilizer businesses are highly regulated. In sugar, Government of India (GoI) is empowered to fix the price paid to cane growers annually (Fair and Remunerative Price, [F&RP]; earlier the statutory minimum price). In some of the state, such as UP, sugarcane pricing is controlled through the State Advised Price (SAP). A large gap between SAP and F&RP, can expose UP based mills to threat of imports from other states, though at present this difference is small. Further, a high SAP, drives up the cost of production, which these mills have been able to offset to an extent, through use of better cane variety thereby improving recovery rates.
 
In the fertiliser segment, the government has periodically tightened energy consumption norms for urea players, without a price increase, in line with its attempt to reduce subsidy outflow. This has impacted profits of those urea players, who have been unable to meet these norms. The next revision in norms, expected in fiscal 2019, can further strain profitability. Additionally, delay in disbursement of subsidy has led to higher reliance on short-term working capital debt, leading to high interest cost.
About the Company

DCM Shriram Ltd is a diversified business group, with the promoters holding 63.8% stake, and the balance held by institutional investors and public. The company is present across the chloro-vinyl (chlor alkali and plastics), sugar and agri inputs (farm solutions: traded agri products and pesticides, urea and bioseed) businesses. Trading of di-ammonium phosphate (DAP) and muriate of potash (MOP) products was discontinued during fiscal 2017. The company is also engaged into Fenesta building system and cement. It also had a rural retail chain of agri products by the name of Hariyali Kisan Bazaar, the operations of which were rationalised in fiscal 2013, due to continuous losses; operations are expected to be fully closed down in the medium term. The company operates its chlor alkali, plastics, urea, and cement businesses in Kota, and the chlor alkali operations in Bharuch, and has captive power plants at both these locations. It has four sugar mills in central UP, with a bioseed division at Hyderabad.

Key Financial Indicators*
Particulars Unit 2017 2016
Revenue Rs crore 5,788 5,780
Profit after tax Rs crore 552 300
PAT margin % 9.6 5.2
Adjusted debt/adjusted networth Times 0.4 0.5
Interest coverage Times 11.0 6.1
*as per CRISIL adjusted numbers

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 crore)
Rating assigned with outlook
NA Commercial paper NA NA 7-365 days 800.0 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  800  CRISIL A1+    --    --    --    --  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
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 Chemical Industry
Rating Criteria for Fertiliser Industry
Rating Criteria for Sugar Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt

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