Rating Rationale

Strengths
* Healthy and diversified business risk profile driven by strong operating efficiencies in chlor-alkali segment and moderate profitability in sugar segment:
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 one of the top three domestic manufacturers of caustic soda, with a total capacity of 1,511 tons per day (tpd) situated at its facilities at Kota (Rajasthan) and Bharuch (Gujarat). Both these capacities have been operating at 90-100% 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 further augment its caustic soda 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.

Profitability in sugar business is moderate. During fiscal 2018, adverse movement in sugar prices due to excess production and government restriction on sale of sugar, led to decline in profitability. However, government has taken various measures to arrest the fall in sugar prices, such as stipulating the minimum support price of sugar at Rs. 29/kg, allowing the mills to export 5 million tonne of sugar during sugar season 2019 (October 1 to April 30). This coupled with commissioning of distillery unit of 150 kilo litres per day (KLD) in January 2018, has led to an improvement in profitability. Further, company's ongoing capex plan of 5000 tonnes of cane per day (TCD) sugar expansion, 30 mega-watt (MW) co-generation power plant and a 200 KLD distillery is expected to further mitigate the volatility in the sugar business.

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 and healthy capital structure. Sustained profitability has improved interest cover and net cash accrual to total debt (NCATD) ratios to 12.6 times and 0.9 time, respectively, in fiscal 2018, from 11.0 times and 0.5 time in fiscal 2017. Prudent funding of capacity expansions undertaken so far, has kept gearing below 1 time for the five years through fiscal 2018. Capital structure should remain comfortable even going forward, despite scheduled capex of about Rs. 1400 crore, to be undertaken over the next two years, as it will be funded through a healthy mix of internal accruals and debt. Any larger than expected debt-funded capital expenditure (capex) or acquisition, adversely impacting the financial risk profile will remain a key monitorable.

Weakness
* 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. However, addition of distillery unit is expected to stabilise the volatility in this segment. Further, profitability in chlor alkali and plastics business remains susceptible to exchange rate fluctuations, import duty levels and crude oil price movements.

* 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 certain 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 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.

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, government tightens energy consumption norms periodically, impacting profits of urea players unless they improve energy efficiencies. Additionally, delay in disbursement of subsidy results in higher reliance on short-term working capital debt, leading to high interest costs and this remains a key rating sensitivity factor.

Liquidity: Healthy
Liquidity is comfortable with cash and cash equivalents of Rs 102 crore as on March 31, 2018 and Rs. 456 crore as on September 30, 2018. Bank limits were also largely unutilised with an average utilisation on Rs 870 crore of fund-based limit, at about 20% over 12 months through October 2018. Further, liquidity is also supported by healthy cash accruals of Rs. 649 crore, as against repayment of Rs. 72 crore during fiscal 2018. During October 2018, company concluded buyback of its shares for Rs. 250 crore, which was funded through internal accruals and cash and cash equivalents. Despite, buyback of shares and expected capex plans, overall liquidity is expected to remain healthy. Expectation of healthy accruals of Rs. 700-800 crore with an annual repayment of about Rs 100 crore over the medium term, adds to the overall liquidity. Company's prudent liquidity policy helps mitigate against cash flows fluctuations.