| DCM Shriram Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper of DCM Shriram Limited (DCM). The rating reflects the company's healthy and diversified business risk profile and the strong financial risk profile, 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 |
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For arriving at the ratings, CRISIL 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. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Healthy and diversified business risk profile Chlor alkali (caustic soda and chlorine) manufacturing is a part of the chlor-vinyl segment of DCM along with poly-vinyl chloride (PVC) resins. The company is the second largest domestic manufacturer of caustic soda, with capacity of 1,843 tonne per day through plants in Kota, Rajasthan, and Bharuch, Gujarat. Sustained price realisation, lower power cost driven by improvement in efficiencies of captive power plants and large-scale operations have 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. Furthermore, plans to increase chlorine consumption through downstream projects should also support the operating margin. DCM owns and operates four sugar mills in Uttar Pradesh with a capacity of 38,000 tons of cane crushed per day. This, coupled with the 350 KLD distillery capacity and 87.5 MW of exportable power, is expected to support the segmental profitability and insulate the company from sector's cyclicality to some extent. The government's efforts to maintain sugar inventory balance in the country thereby supporting exports and increase the percentage of ethanol blending with petrol is also likely to support profitability in the medium term. The business risk profile also benefits from the company's small but diversified presence across agri-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 loss making international seed operations in two territories is also strengthening the business performance. * Strong financial risk profile The financial risk profile is underpinned by comfortable debt protection metrics and a healthy capital structure. Sustained profitability has ensured comfortable interest coverage and net cash accrual to total debt ratios, at over 7 times and 0.3 time, respectively, as on September 30, 2020. Prudent funding of capacity expansion has kept gearing below 1 time over the six fiscals through 2020. Capital structure should remain comfortable over the medium term despite scheduled capital expenditure (capex) of around Rs 1,000 crore in the next two years, to be funded mainly through internal accrual. Any larger-than-expected, debt-funded capex or acquisition that adversely impacts the company's financial risk profile will be a 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. Prices of caustic soda declined steeply in the first half of fiscal 2021, mainly on account of excess supply because of the recently commissioned capacities and lower demand from the end user industry. Demand for the chemicals segments has recovered, but realisations are expected to remain under pressure over the next 6-12 months. 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 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. This downfall in sugar prices is cushioned by the measure of Central Government through fixation of Minimum Support Price (MSP) of Sugar. MSP for sugar are yet to be announced for SY 20-21. Further, the addition of distillery units is expected to partially insulate the company from fluctuations in the prices of molasses. * Exposure to regulatory risks in the sugar and fertiliser industries 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 minimum price). 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 offset to some extent through the use of better cane variety, thereby improving their cane recovery rate. The government also announces a minimum support price for sugar every year (currently at Rs 31/kg) which supports the realization of sugar. Furthermore, the government's focus on increasing ethanol blending with petrol to 10% from the current around 5% has led to high demand for ethanol, leading to stable performance of the sugar business. Given the government's thrust on self-sufficiency in food grain production, the fertiliser industry is strategic but highly controlled. Of late, the government has focused on reducing subsidy without increasing prices by urging companies to adopt more efficient methods of urea production. In line with these measures, the government tightens energy consumption norms periodically, impacting profits of urea players unless they improve energy efficiency. The energy norms applicable for DCM's urea unit under NUP-2015 were to be revised downward from April 1, 2020, after being deferred for two fiscals and further extended by six months until September 2020. The company needs to incur significant capex to meet the revised energy norms, which may not generate adequate returns. DCM has not finalised the related capex and has approached the government for relaxation of the energy saving scheme. Additionally, any delay in disbursement of subsidy results in higher reliance on short-term working capital debt, which raises the interest cost. Therefore, this is a key rating sensitivity factor. |
| Liquidity Strong |
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Liquidity is comfortable, with cash and equivalents of around Rs 1,100 crore as on September 30, 2020. Utilisation of bank limit of Rs 1,150 crore averaged around 55% over 12 months through October 2020. Liquidity is also supported by expected cash accrual of Rs 700-1,000 crore over the medium term against annual debt obligation of Rs 120-140 crore. Overall, liquidity is expected to remain healthy despite the ongoing capex. A prudent liquidity policy helps offset fluctuations in cash flow. |
| Rating Sensitivity factors |
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Downward factors * Lower-than-expected operating performance leading to significant decline in the operating margin * Significant weakening of the financial risk profile on account of large, debt-funded capex or any acquisition leading to net debt-to-earnings before interest, taxes, depreciation and amortisation increasing above 2 times on a sustained basis |
| About the Company |
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DCM is a diversified business group, with presence across the chloro-vinyl (chlor alkali and plastics), sugar and agri inputs (farm solutions; traded agri products and pesticides; 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. |
| Key Financial Indicators - (as reported by DCM) | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
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