Detailed Rationale

CRISIL Ratings has upgraded the ratings on the long-term bank facilities of E.I.D. Parry India Limited (EID Parry) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive‘. CRISIL Ratings has also reaffirmed the ratings on EID Parry’s short-term bank facilities and commercial paper at ‘CRISIL A1+’.

 

The rating upgrade is driven by expectations of sustained improvement in EID’s integrated operations spread across sugar, distillery, co-gen and refining operations, leading to continued healthy cash generation. Besides, with only moderate capital spending planned over the next 2-3 years, debt levels are expected to remain under control, leading to continued improvement in debt metrics. The rating will also continue to benefit from the strong group support from Murguppa group.

 

For fiscal 2022, EID Parry has posted better business performance in the sugar, power and distillery verticals, which have helped offset modest performance of the refinery business and neutraceuticals vertical. The company reported higher operating margins of  over 6% in fiscal 2022 (3% in fiscal 2021), which was better than anticipated.  Revenues are also expected to be higher in fiscal 2023 due to increase in distillery capacity and continuing high crushing due to prediction of a normal monsoon season. Sugar prices are also expected to remain stable at ~Rs.33-34/kg, while the company would benefit from slightly higher ethanol prices and recovery in performance of neutraceutical business, resulting in operating profitability ranging between 6.5-7.5%. Steady revenue growth, driven by higher distillery capacity is also expected over the medium term.

 

Financial risk profile and debt protection metrics improved since fiscal 2021 due to debt reduction initiatives taken during the year. Total debt had also reduced to about Rs. 797 crore as on March 31, 2021 as compared to 2278 crore as on March 31, 2020. This was following a 4% stake sale in Coromandel International Limited (CIL, rated ‘CRISIL AA+/Positive/CRISIL A1+’)) during fiscal 2021 which resulted in an inflow of ~Rs 800 crore. Company also received dividend of ~Rs 200 crore from CIL which was also used to retire debt. EID Parry’s standalone debt further reduced to Rs.104 crore in fiscal 2022, from Rs.554 crore in fiscal 2021, supported by better accruals. Albeit, higher inventory related debt relating to PSRIPL in fiscal 2022, led to overall debt levels remaining at just over Rs.822 crore in fiscal 2022. Debt metrics such as interest cover improved to over 7.7 times in fiscal 2022 from over 4 times in fiscal 2021 as full benefit of reduced debt levels was seen in fiscal 2022, while ratio of total outside liabilities /tangible net worth (TOL/TNW) remained range bound at 1.5-1.6 times. Going forward, the company has modest expansion plans of Rs.250-300 crores in fiscal 2023 mainly to add distillery capacity, and only routine modernization is anticipated thereafter. The same will be prudently funded by mix of debt and accruals, resulting in debt metrics remaining at comfortable levels.

 

The ratings continue to reflect EID Parry’s established market position in sugar business, derived from integrated nature of operations with diversified revenue profile, above average financial risk profile and financial flexibility derived from being part of the Murugappa group, and as holding company of CIL. These strengths are partially offset by the susceptibility of its business performance to downturn in the sugar business and to regulatory changes in the sugar industry and modest  performance of PSRIPL.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of EID Parry with its two subsidiaries namely PSRIPL and US Nutraceuticals LLC (USN). CRISIL Ratings has also moderately consolidated its joint venture (JV) Algavista Greentech Pvt Ltd (Algavista; ‘CRISIL BBB+/Stable/CRISIL A2’) to the extent of support required over the medium term. This is because these entities are in the similar line of business as EID Parry. CRISIL also believes EID Parry will extend both business and need-based financial support, to scale up operations.

 

CRISIL Ratings has also factored in support from the Murugappa group, since EID Parry is an integral part of the Murugappa group representing the group’s presence in sugar industry. The group is also expected to extend financial support in case of exigencies.

 

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:

• Diversified revenue profile due to integrated nature of operations: EID Parry is a large integrated sugar producer. It has the capacity to crush 40,300 tonne per day (TPD) of sugarcane, a co-generation plant of 160 megawatt, distillery of 297 kilo litre per day, and sugar refinery of 3000 TPD (through PSRIPL). Large scale, integrated operations with the power and distillery business along with nutraceuticals provide moderate cushion from cyclicality in the sugar business. After a decline in sugar crushing in Tamil Nadu for 3-4 years till fiscal 2020,  due to weak monsoons, cane availability improved since fiscal 2021 due to normal monsoons. Company crushed 50.21 Lakhs MT of sugar cane in fiscal 2022 compared to 39.69 lakhs MT in fiscal 2021. Other businesses (co-generation and distillery) have also performed better in fiscal 2022 showing overall improvement in business. The company distilled 779 lakhs Liter of ethanol in fiscal 2022 compared to 594 lakhs liter in fiscal 2021,. Average realization also improved to Rs.58.0 per liter in fiscal 2022 from Rs.55.44 per liter in fiscal 2021. With increasing focus on distillery operations and with scheduled commercial operation of a multi-input based distillery at Sankli in fiscal 2023, vulnerability of performance to volatile sugar production and prices is expected to gradually reduce over the near to medium term.

 

• Above average financial profile: EID Parry’s financial performance further improved in fiscal 2022 as cash accruals improved with stable realizations in sugar and distillery businesses. Additionally, company, on a consolidated basis has reduced debt significantly (~Rs 1400 crore) in fiscal 2021 by utilizing proceeds from stake sale of CIL and dividends from CIL, and maintained its debt levels between Rs.800-850 crores in fiscal 2022.

 

While business cash flows will remain steady, continuing high dividend inflows from CIL will additionally support overall cash flows. Debt protection metrics are expected to remain comfortable with only routine maintenance capex and investment in Sankili distillery plant is planned (Rs.250-300 crore in fiscal 2023 and ~Rs.70-100 crore in fiscal 2024. Debt levels are expected to be maintained at Rs.800-900 crores  over the medium term, keeping  debt metrics comfortable. For instance, TOL/TNW ratio is expected to sustain at 1.5-1.6 times over the medium term.

 

• Financial flexibility, being part of the Murugappa group: EID Parry is one of the leading entities in the Murugappa group of companies. It also derives substantial financial flexibility from being the holding company for CIL. Its 56% stake in CIL was valued at almost Rs. 17752 crores as on August 11, 2022. CIL has a healthy dividend track record, which is expected to continue over the medium term. EID Parry received dividend of almost Rs.1,000 crores between fiscal 2016 and 2022; steady dividend flows support its overall profits, and helps partly mitigate impact of volatility in its business. Additionally, company also sold ~4% stake in CIL during fiscal 2021, proceeds of which has largely been used to pare debt. The group also enjoys strong reputation with the lending community, which helps entities including EID Parry to raise funds at attractive coupon rates.

 

Weaknesses:

• Susceptibility to volatility in sugar prices and regulatory changes: While the input prices are driven by the government, sugar prices are volatile and based on open market prices (which are dependent on the production levels) leading to volatility in players’ profitability. Besides, the government regulates domestic demand-supply through restrictions on imports and exports, and stock holdings. Regulatory mechanisms and dependence on monsoons have rendered the sugar industry cyclical. EID-Parry's operating profitability will continue to improve due to cost reduction initiatives, shut down of loss making plants in Tamil Nadu and integrated nature of operations.  

 

While overall domestic demand in fiscal 2021 was impacted due to lower demand from institutional clients on account of the pandemic in the first half of the fiscal. Though demand of sugar normalized once lock-down was lifted and continued to improve throughout the fiscal year. Global demand for sugar also recovered in fiscal 2021,  and remained stable in fiscal 2022.

Additionally, demand for ethanol continues to be strong as oil marketing companies increased offtake to meet the ethanol blending norms. All these factors have resulted in improvement in the performance of large integrated domestic sugar companies in  fiscals 2021 and 2022 which is expected to continue in the medium term also.  

 

The government has not increased the MSP of sugar of Rs 31 per kg for over a year, as domestic prices have already recovered to ~ Rs. 33-Rs. 34 per kg.  Besides, the Government has also rolled backed the  export subsidy announced in Dec’2020. At the same time,  government has announced benefit in terms of higher domestic sugar quota for  companies with higher exports and higher diversion of sugar cane towards ethanol production.

 

Sugarcane plantation increased by 10% in SS2021 and is expected increase by ~1%-2% in SS2022 and SS2023. This increase in acreage is not expected to translate in higher sugar production to same extent due to increased diversion of sugarcane for production of ethanol. Export quota has also been capped at 10 MMT in the current SS2022 which is expected to keep inventory levels in check. While cane prices have been increased marginally to provide relief to farmers, integrated players are less likely to face any major impact as distillery and co-generation plants will lend stability to margins. Government interventions, however, will continue to remain a driver for profitability of sugar mills and continue as a key rating sensitivity factor.

 

• Modest Performance of PSRIPL: PSRIPL imports raw sugar predominantly from Brazil, refines the same and exports. PSRIPL’s operating performance in fiscals 2018 and 2019 had been severely impacted by weak sugar prices, resulting in net losses. This was due to sizeable inventory losses following decline in global raw sugar prices. Global sugar prices had been on a declining trajectory till September 2018, following higher sugar production from India, Thailand, Pakistan and the European Union. However, following lower sugar production in Brazil amidst increasing diversion of Brazil’s sugar output towards ethanol manufacturing, global sugar prices recovered gradually since October 2018, leading to PAT breakeven from the second half of fiscal 2019. The company reported loss at EBITDA and PAT level in fiscal 2021 mainly due to inventory losses. Though the operating margins improved in fiscal 2022. Company still reported losses at net level, in fiscal 2022, albeit at  a much lower level than fiscal 2021. Export prices of white sugar have remained largely stable, and company expects turnaround of refinery business in fiscal 2023. The company is already estimated to register modest EBITDA level profits in the first quarter of fiscal 2023.

Liquidity: Strong

EID Parry has strong liquidity driven by its association with Murugappa Group providing significant franchise with lending community. On standalone basis, EID Parry’s liquidity is adequate as well. With improvement in operating cash flow, access to large unutilized bank lines, and steady dividend inflows from CIL, company’s liquidity remains strong. Additionally, company has strong refinancing ability as demonstrated in the past also. The company has already redeemed NCD’s due in fiscal 2022 and prepaid substantial portion of long term debt in fiscal 2021. Accruals are expected to be sufficient to meet nominal remaining repayments, largely relating to distillery expansion loans

 

EID Parry also has access to fund based limits of ~Rs. 900 crore, utilized to the tune of 4% on an average over the 12 months ended March, 2022. Additionally, EID Parry’s strong relationship with the lending community, and demonstrated ability to monetize non-core assets including land, is expected to enable it to overcome any cash flow mismatches.

Outlook: Stable

CRISIL Ratings expects better contribution from EID Parry’s distillery and co-generation operations, and stable sugar demand in the domestic and export market will continue to drive improved cash generation. Debt metrics are expected to remain at comfortable levels, supported by steady cash generation and prudent funding of capex. Also, support from Murugappa group is expected to be forthcoming, if required.

Rating Sensitivity factors

Upward factors:

• Better than expected improvement in business performance at distillery, co-gen and PSRIPL, benefitting cash generation
• Sustaining debt at less than Rs 700-800 crore, which along with better cash generation, will further strengthen debt metrics
• Upward movement in the credit profile of Murugappa group.

 

Downward factors:

• Substantially weaker business performance due to decline in sugar prices or sizeable increase in cane prices, or weaker than expected profitability from distillery and PSRIPL, impacting cash generation
• Slower than expected reduction in inventory or higher than expected capital expenditure leading to debt increasing sharply, impacting key debt metrics – TOL/TNW increasing beyond 2-2.25 times
• Decline in credit profile of Murugappa group.

About the Company

EID Parry is part of the Rs. 54,722 crore Chennai based Murugappa group. The group has diverse business activities that include abrasives, automotive components, cycles, sugar, farm inputs, fertilizers, plantations, construction and bio-products.

 

EID Parry represents the group's sugar manufacturing interests. The promoters held 45% stake in the company as on March 31, 2022. EID Parry acquired 76% stake in Karnataka-based SSL for Rs.49.62 crores in October 2009, and increased the stake to 100% in September 2011 for Rs.18.0 crores. In May 2014, SSL was merged with EID Parry (effective from April 1, 2013). In 2010, EID Parry acquired 65% stake in GMR Industries Ltd (which was subsequently renamed Parry Sugar Industries Limited (PSIL)) for Rs.98.87 crores. In March 2013, the company completed the merger of two of the three mills of PSIL, at Haliyal in Karnataka and at Sankili in Andhra Pradesh, with itself (effective April 1, 2012). In April 2017, the third mill in PSIL was also merged with EID Parry (effective from April 1, 2016).

 

In December 2017, EID Parry announced slump sale of its in-house bio-pesticides business along with its entire stake in fully owned subsidiary – Parry America Inc, USA to CIL for a total purchase consideration of Rs 338 crore, which was received in April 2018. The company also commenced a 50:50 JV with Synthite Industries Private Limited (rated ‘CRISIL AA-/Positive/CRISIL A1+’). The JV is  involved in manufacturing value added algae products.

Key Financial Indicators (Consolidated)

Particulars	Unit	2022	2021
Revenue	Rs crore	4484	4440
Profit after tax (PAT)	Rs crore	245	728#
PAT margin	%	5.5	16.4
Adjusted debt/ adjusted net worth	Times	0.42	0.45
Interest coverage	Times	7.77	4.32

#due to exceptional income of Rs.715.0 cr from stake sale of 4% in Coromandel International Ltd (CIL)

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity Level	Rating Assigned with Outlook
NA	Commercial Paper	NA	NA	7-365 Days	650	Simple	CRISIL A1+
NA	Bank Guarantee^	NA	NA	NA	100	NA	CRISIL A1+
NA	Cash Credit#	NA	NA	NA	400	NA	CRISIL AA/Stable
NA	Letter of Credit*	NA	NA	NA	50	NA	CRISIL A1+
NA	Long Term Loan	NA	NA	Apr-24	63.50	NA	CRISIL AA/Stable
NA	Long Term Loan	NA	NA	Dec-26	92.5	NA	CRISIL AA/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	30.00	NA	CRISIL AA/Stable
NA	Proposed Fund Based Bank Limits	NA	NA	NA	330	NA	CRISIL AA/Stable

# 50% interchangeable to non-fund based working capital limits

^Interchangeable with letter of credit and fund based working capital limits

*Interchangeable with bank guarantee and fund based working capital limits