Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of E.I.D. Parry India Limited (EID Parry).

 

The ratings continues to reflect EID Parry’s established market position in the sugar business, derived from integrated nature of operations with diversified revenue profile, average and adequate financial risk profile, and superior financial flexibility derived from being the holding company of Coromandel International Limited (CIL, rated ‘CRISIL AAA/Stable/CRISIL A1+). The ratings also factor in the strong support from Murugappa Group as EID Parry is an integral part of the group.  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 and distillery sector, and modest though improving performance of its subsidiary, engaged in the sugar refinery business, Parry Sugars Refinery India Pvt Ltd (PSRIPL, ‘CRISIL A+/Stable/CRISIL A1’).

 

EID Parry’s business risk profile expected to remain stable in the near to medium term despite changes in the regulatory environment for sugar and sugar allied products since November 2023. Amount of sugar cane crushed is expected to be ~50 lakh tonnes in the current fiscal despite lower sugar cane production in Karnataka due to EID Parry’s strong relationship with the sugar cane producers and better availability of sugar cane from Tamil Nadu. Ample crushing will lead to stable production of sugar at ~5 lakhs tonnes in the current fiscal. The impact of restrictions on diversion of sugar for ethanol production by the government for ethanol year 2024 (EY2024) is expected to be felt from the fourth quarter of the current fiscal and in the next fiscal as well. That PSRIPL is expected to perform better in fiscal 2024 compared to previous fiscal due to firm prices of sugar in the international market, and good spreads over raw sugar. Overall, total revenue on consolidated level is expected to grow by over 20% in fiscal 2024, primarily driven by PSRIPL, better sugar realizations at EID and to an extent higher distillery revenues. Other business segments (co-generation, nutraceutical etc) are expected to generate stable revenue. However, the larger impact of controlled production of ethanol for gasoline blending and expected correction  in international sugar prices will lead to some moderation in revenues in fiscal 2025. 

 

Operating profitability is expected to improve to 4-4.5% in fiscal 2024 and remain almost rangebound in fiscal 2025, from ~2% in fiscal 2023, due to better profitability from sugar business, which will help partially offset impact of lower distillery volumes (higher margin) for ethanol blending in the fourth quarter of fiscal 2024.

 

EID-Parry’s financial risk profile expected to remain steady, with debt protection metrics viz interest coverage, gearing and TOL/TNW (total outside liability/total tangible net worth) ratios remaining adequate. Interest coverage expected to improve ~3.5 times in the near to medium term compared to 2.7 times in fiscal 2023 with better absolute operating profitability. Gearing and TOL/TWN expected to remain below 0.7 and 1.8 times respectively in the medium term despite addition of capex related debt. EID Parry is expected to incur capex of ~Rs 350 crore in in fiscal 2024, which will involve spend of Rs 250 crore towards expanding their distillery capacity by 165 KLPD (debt funded to extent of Rs.250 crore). Over the medium term, the company is expected to incur capex of ~Rs.100-110 crore annually, mainly for routine modernization, which will be funded mainly from accruals. EID Parry’s liquidity is adequate with expected net cash accruals of Rs 230-300 crore in the near to medium term and only modest repayment obligations.

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 INC (USN). CRISIL Ratings has also moderately consolidated its joint venture (JV) Algavista Greentech Pvt Ltd (Algavista)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 tone per day (TPD) of sugarcane, a co-generation plant of 140 megawatt, distillery of 417 kilo litre per day (to be increased to 582 KLPD by the end of fiscal 2024), and sugar refinery of 9 Lakh MT per year (through PSRIPL). Large scale, integrated operations with the power and distillery business along with nutraceuticals provide moderate cushion from cyclicality in the sugar business. EID-Parry is expected to crush above 50 Lakhs MT of sugar cane in fiscal 2024. Also, the company is expected to produce more than 1100 lakhs liters of ethanol in fiscal 2024 despite restrictions on diversion of sugar for production of ethanol for the EY2024. Average realization for ethanol is also expected to improve above Rs 61/liters in the near term. EID Parry is also expanding its distillery capacity by additional 165 KLPD which will be available from the fourth quarter of fiscal 2024. However, utilization of the distillery facility will be lower at 55-60% in the near term due to restriction on diversion of sugar for ethanol production. The refinery segment is expected to perform better in the near term than fiscal 2023 due to higher volumes and higher international sugar prices. Other businesses (co-generation and nutraceutical) expected to have stable business performance in the near term. With increasing focus on distillery operations and with additional capacity becoming available in fiscal 2025, vulnerability of performance to volatile sugar production and prices is expected to gradually reduce over the medium-term considering normalization of ethanol policy and stable business environment.

 

Adequate financial risk profile: 

EID Parrys’ financial risk profile is expected to remain adequate and improve gradually over the medium term, as benefits from current distillery expansion fructify. The company’s total debt is expected to range between Rs.1100-1200 crore by end March 2024, including long term debt added for distillery expansion, and then gradually reduce over the medium term, with progressive debt repayment and only modest annual capital spending of ~Rs100 crore from fiscal 2025. Interest coverage ratio expected to remain above 3.5 times in the near to medium term compared to 2.70 times in fiscal 2023 driven by improving absolute operating profitability and moderate working capital utilization. Gearing and TOL/TNW ratios are expected to remain below 0.70 times and 1.8 times respectively in the near to 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 57% stake in CIL was valued at ~Rs. 19500 crores on January 18, 2024. 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 2018 and 2023 from CIL. Till second half of fiscal 2024, EID Parry has already received dividend of Rs 100 crore from CIL. Steady dividend flows support EID Parry’s overall profits and helps partly mitigate impact of volatility in its business. The 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, closure of lossmaking plants in Tamil Nadu and integrated nature of operations.

 

The GoI has showcased the intent to fasten the move to an ethanol-based economy, by advancing the 20% ethanol blending target (with gasoline) to 2025 from 2030. Additionally, the government has made supplies profitable by raising ethanol prices every fiscal, in addition to differential pricing for B-Heavy and the direct cane juice route and providing interest sops on loans for setting up ethanol-based distilleries. However recent restrictions announced by government of India on diversion of sugar for ethanol production is expected to impact the profitability of integrated sugar players in the near term. Though this is temporary, and the restriction is expected to be lifted once sugar production normalizes in the domestic market. Since the sugar industry is highly regulated, any change in the regulatory stance and continuation of government support to sugar sector (including distilleries and ethanol pricing) are key monitorable.

 

Modest though improving performance of PSRIPL:

Performance of the refinery segment under PSRIPL was modest with losses increasing in fiscal 2023, due to stoppage of operations for 40-45 days owing to accidents at its plant. The company also consequently incurred high demurrage charges, as ships arrived at the port to lift the quantity for exports, but shipments got delayed. Besides, higher coal costs and replacement of damaged raw materials (due to accidents) at higher costs, also impacted profitability in fiscal 2023.

 

However, operation has normalized in the current fiscal with losses declining sharply in the first half of fiscal 2024. Performance of PSRIPL is expected to improve in the current fiscal driven by elevated sugar prices in the international market and higher volumes compared to previous fiscal. Revenue from the segment has already grown by 41% year on year till the first half of fiscal 2024. International sugar prices are expected to remain firm throughout the current year fiscal on lower sugar supply concerns from India in the international markets.

Liquidity: Strong

EID-Parry’s liquidity position is strong and supported by fund based working capital lines of ~Rs 1200 crore which were moderately utilized at 21% in the past 12 months. Also, the company holds majority stake in CIL, valued at ~Rs.19500 crore as on January 18, 2024, and if required, some stake can be sold in the event of any financial exigencies.

 

EID-Parry is expected to incur capex of ~Rs 350 crore in fiscal 2024 of which Rs 250 crore is being incurred for expanding its distillery capacity by 165 KLPD. A term loan of ~Rs.240 crore is being availed for the distillery expansion, which will enjoy interest subvention of ~2%.  Annual net cash accruals of Rs.230-280 crore will be sufficient for annual debt repayment of Rs 40-90 crore in the near to medium term, and part fund capex plans (Rs.100 crore annually from fiscal 2025).

 

ESG Profile of EID Parry:

CRISIL Ratings believes that EID Parry’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The company’s commitment to ESG principles will play a key role in enhancing stakeholder confidence.

 

Sugar production has a moderate impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also moderate considering the impact of operational activities on the company’s own employees. The company is focusing on mitigating environmental and social risks.

 

Key ESG highlights:

• The Company has a continuous focus on conservation of energy. Targets in terms of sourcing mix and cost are set every year and action plans are drawn.
• Share of energy from renewal sources was 82.60% in FY23 which was better than the industry.
• The Company has a gender diversity of 2% and Loss time Injury Frequency Rate (LTIFR) rate of 0.82 for fiscal 2023.
• The governance structure is characterized by 50% of its board comprising independent directors. Position of the chairman and CEO are split. It has a committee at the Board level to address investor grievances and also put out extensive disclosures.
• There is growing importance of ESG among investors and lenders. The commitment of EID Parry to ESG principles will play a key role in enhancing stakeholder confidence, given its access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings expects better contribution from EID Parry’s sugar and refinery operations, as well as co-generation operations, will help offset lower contribution from distillery operations, leading to good cash generation. Debt metrics are expected to remain at adequate 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 modest levels of below Rs.800 crores, 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. 74,000 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 44.55% stake in the company as on July 1, 2023. 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, Algavista, with Synthite Industries Private Limited (rated ‘CRISIL AA/Stable/CRISIL A1+’). The JV is involved in manufacturing value added algae products and natural food coloring agent called phycocyanin.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	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	Oct-24	92.5	NA	CRISIL AA/Stable
NA	Long Term Loan	NA	NA	Mar-25	35	NA	CRISIL AA/Stable
NA	Long Term Loan	NA	NA	Nov-27	8	NA	CRISIL AA/Stable
NA	Long Term Loan	NA	NA	Mar-28	87	NA	CRISIL AA/Stable
NA	Long Term Loan	NA	NA	Mar-28	150	NA	CRISIL AA/Stable
NA	Short Term Loan	NA	NA	NA	100	NA	CRISIL A1+
NA	Short Term Loan	NA	NA	NA	100	NA	CRISIL A1+
NA	Proposed Fund Based Bank Limits	NA	NA	NA	352.5	NA	CRISIL AA/Stable

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

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

%Interchangeable with bank guarantee and fund based working capital limits