| 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 Ltd. The rating reflects the company's healthy and diversified business risk profile, underscored by strong operating efficiency in the chlor-alkali segment, improved profitability in the sugar segment following higher prices, and diversification into the distillery business. The rating also factors in a 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 Shriram Ltd and its associate and subsidiary companies, considering the operational, managerial, financial linkages between them. |
| Key Rating Drivers & Detailed Description |
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Strengths * Healthy and diversified business risk profile driven by strong operating efficiency in the chlor-alkali segment and improved profitability in the 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 one of the top three domestic manufacturers of caustic soda, with a capacity of 1,843 tonne per day (tpd) through plants in Kota (Rajasthan) and Bharuch (Gujarat). Both plants have been operating at 85-90% utilisation. Sustained price realisation, controlled power cost because of captive power plants, and large-scale operations have ensured operating margin has been healthy 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 operating margin. Profitability in the sugar business has been higher this fiscal, mainly on account of a Rs 2 increase in minimum selling price of sugar by the government from Rs 29 to Rs 31 per kg. That, coupled with the setting up of a 350 kilo litres per day (KLD) distillery unit, is expected to improve profitability further and insulate the company to some extent from the fluctuation in the prices of molasses. The government has also taken measures to improve the profitability and liquidity of sugar mills, such as by creating a buffer stock of 4 million tonne, for which it will pay Rs 1,670 crore of inventory carrying cost; by increasing the price of ethanol; and by providing an export subsidy of Rs 10.44 per kg of sugar, which is expected to support profitability in the medium term. The business risk profile also benefits from the small but diversified presence across agriculture (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 ensured comfortable interest cover and net cash accrual to total debt (NCATD) ratios to 11.7 times and 0.6 times, respectively, in fiscal 2019, and 12.6 times and 0.9 time, respectively, in fiscal 2018. Prudent funding of capacity expansion has kept gearing below 1 time in six fiscals through 2019. Capital structure should remain comfortable over the medium term despite scheduled capex of around Rs 1,200 crore to be undertaken over the next two years, as it will be funded mainly through internal accrual. Any larger-than-expected, debt-funded capital expenditure (capex) or acquisition that adversely impacts the company's financial risk profile will be a monitorable. Weaknesses * Volatility in sugar, chlor alkali, and plastics business Profitability in the chlor alkali and plastics business remains susceptible to international prices, exchange rate fluctuation, import duty levels, and crude oil prices. Sugar prices are largely market-driven and depend on production during a season (October 1 to April 30) and inventory levels. Dependence on monsoon has also made the sugar industry cyclical, as rains have a bearing on the production and the recovery rate of cane. That, in turn, impacts domestic sugar production. However, the addition of the distillery unit is expected to insulate the company from price fluctuation of molasses to some extent. * Exposure to risks related to regulatory nature of sugar and fertiliser industries Both 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 (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 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. 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 norm applicable for DCM's urea unit under NUP-2015 were to be revised downward from April 1, 2020, after being deferred for two fiscals. The company needs to incur significant capital expenditure to meet the revised energy norms, which may not generate adequate returns. DCM has not finalised the related capital expenditure 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 Rs 836 crore as on September 30, 2019. Utilisation of bank limit of Rs 1,120 crore averaged 60% over 12 months through October 2019. 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 ongoing capex. And a prudent liquidity policy helps offset fluctuations in cash flow. |
| About the Company |
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DCM Shriram Ltd 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 also manufactures the Fenesta building system and cement. It operates its chlor alkali, plastics, urea, and cement businesses from Kota and the chlor alkali operations from Bharuch, where it has captive power plants. The company has four sugar mills in central UP, with a bioseed division in Hyderabad. It also had a rural retail chain of agri products by the name of Hariyali Kisan Bazaar, operations of which were rationalised in fiscal 2013 after continuous losses; operations are expected to be fully shut in the near term. |
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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. 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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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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