CRISIL has reaffirmed its ratings on the bank facilities and debt instruments of E.I.D. Parry India Limited (EID Parry) at 'CRISIL AA-/Stable/CRISIL A1+'.
 
EID Parry's revenues are expected to register a modest decline in fiscal 2021, due to flattish sugar realisations (minimum support price (MSP) of Rs.31/kg) as well as sale volumes. Institutional sales which account for 20-25% of the company's sugar volumes are expected to be impacted by lower demand from end-user industries, following the Covid-19 pandemic. Also, exports are expected to much lower than anticipated due to weakening international sugar realisations. Besides, revenues from distillery operations too are expected to slightly impacted due to lower off-take for blending of ethanol with petrol by oil refining companies and for manufacture of potable alcohol. Ethanol sale for manufacture of sanitisers though is expected to increase.
 
Sugar operations are also not expected to materially improve in fiscal 2022, due to higher sugar output expected in the country, which will keep sugar realisations under check. 
 
Despite flattish sugar and distillery revenues, the closure of loss making plants in Tamil Nadu, cost reduction measures including rationalization of work-force, along with only limited increase in cane cost, is expected to lead to help support operating profitability at 6-8% over the medium term.
 
Besides, the performance at its refinery subsidiary, Parry Sugars Refinery India Private Ltd (PSRIPL, rated 'CRISIL AA-(CE)/CRISIL A+/Stable/CRISIL A1'), is expected to be much better in fiscal 2021 as spreads have been locked in at higher than current trending rates for substantial volumes; earlier in the two previous fiscals, PSRIPL reported sub-par performance due to weak global sugar prices and delay in off-take by its customers owing to falling spreads.
 
Consolidated debt has also reduced to about Rs 1,850 crore estimated as on March 31, 2020 as compared to Rs 2,174 crore as on March 31, 2019. This was following gradual liquidation of inventory at PSRIPL, with improvement in off-take from customers.
 
EID-Parry is expected to undertake capex of Rs.350 crore in fiscals 2021 and 2022, for setting up new ethanol capacities, and modernization of existing plants. It will avail low cost subsidized debt for a large part of the capex. While short term debt levels at EID Parry are expected to remain range bound, lower stocking at PSRIPL and long term debt repayments of ~Rs.330 crore in fiscals 2021 and 2022, are expected to lower consolidated debt levels by 5-10% over the medium term.
 
The ratings continue to reflect EID Parry's established market position in sugar business, derived from integrated nature of operations with diversified revenue profile, financial flexibility derived from being part of the Murugappa group, and as holding company of Coromandel International Ltd (CIL, rated 'CRISIL AA+/Stable/CRISIL A1+'). 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, sub-par though improving performance of PSRIPL, and its moderate financial risk profile.

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of EID Parry with its two subsidiaries, namely PSRIPL and US Nutraceuticals LLC (USN). CRISIL 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 its subsidiaries, and joint venture.  
 
CRISIL 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.

Strengths
* Diversified revenue profile due to integrated nature of operations
EID Parry is a large integrated sugar producer. It has the capacity to crush 45,800 tonne per day (TPD) of sugarcane,  co-generation plants of 160 megawatt capacity, distilleries with capacity of of 234 kilo litre per day, and a 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. Sugar crushing in Tamil Nadu has continuously declined in the past 3-4 years, and are expected to marginally improve in the current sugar season. Lower cane availability and volatile sugar prices have led to moderation in EID Parry's performance in the recent past. Performance of PSRIPL has also been muted. However, other businesses (co-generation and distillery) have helped partially stem impact of weak performance of the sugar businesses.

* 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 60.53% stake in CIL was valued at almost Rs. 10,800 crores on May 05, 2020. CIL has a healthy dividend track record, which is expected to continue over the medium term. EID Parry received dividend of almost Rs.400 crores between fiscal 2017 and 2020; steady dividend flows support its overall profits, and helps partly mitigate impact of volatility in its business. 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.

While EID-Parry's operating profitability may improve marginally due to cost reduction initiatives and shut down of loss making plants in Tamil Nadu, operating profitability for most players will be impacted in fiscal 2021 by reduction in industrial usage of sugar, lower demand for sugar mills derivative ' ethanol, and fall in exports.

Firstly, industrial usage, which accounts for nearly two-thirds of the annual demand of ~26 million tonne,  will be impacted as several food manufacturing units ' including soft beverages, chocolates, confectionery, bakeries, hotels, restaurants and cafes ' are either shuttered or running at low capacities. As a result, overall domestic demand is expected to be lower by 1.5-2 million tonne in the current sugar season (SS) 2020 (refers to the period October 1, 2019 to September 30, 2020), as reflected in softening sugar prices in recent weeks.

Second, oil marketing companies would reduce ethanol off-take because the lockdown due to the pandemic has lowered demand for petrol and diesel. Besides, they have limited storage capacity available. Production of potable alcohol from ethanol will also be impacted because of lower demand from distillers. Third, international sugar prices have fallen ~24% between January and April 2020 as large supplier-nations, including Brazil, are switching from ethanol to sugar due to slack global oil demand and low crude oil prices. Thus, exports from India are likely to remain flattish compared with a 25-30% growth expected earlier.

In the milieu, sugar inventory becomes the key monitorable. India had started SS 2020 with an opening stock of 14.5 million tonne. However, despite ~20% lower production, the closing inventory is likely to be high at 12.8-14 million tonne ' that's equal to six months' consumption ' because of slack industrial demand and exports.

The saving grace in fiscal 2021 for domestic sugar mills is the MSP of Rs 31 per kg fixed by the government. But for this, sugar realisations would have fallen further, given high stocks. Consequently, lower accruals and higher inventory, are expected to lead to elevated debt levels, especially on working capital front, for most sugar producers. With sugar output expected to increase by atleast 15-20% in SS2021, performance for most sugar players is expected to remain subdued in fiscal 2022 as well.

* Sub-par performance of subsidiary, PSRIPL
PSRIPL imports raw sugar predominantly from Brazil, refines the same and exports. PSRIPL's operating performance was severely impacted by weak sugar prices, resulting in net losses of Rs.89 crore in fiscal 2019. This was due to sizeable inventory losses following decline in global raw sugar prices. In fiscal 2020, net losses reduced sharply (estimated at Rs 10 crore) primarily on account of recovery in global sugar prices till February 2020. Overall losses in fiscal 2021 could have been lower but for decline in sugar prices during March 2020 that resulted in substantial mark to market losses on the inventory.

Going forward the global sugar prices are expected to remain muted as due to the COVID-19 outbreak, and resultant fall in crude oil prices; Brazil's diversion towards ethanol manufacturing is expected to be lower resulting in an increased availability of sugar at the global level. To an extent, this will be partly offset by the lower output in other large sugar manufacturing regions including India and Thailand. Consequently, no further significant correction in international sugar prices is likely, though PSRIPL may still register losses at net level.

* Moderate financial profile
EID Parry's financial performance moderated in fiscal 2019 as cash accruals were impacted following subdued performance of the sugar business and losses in PSRIPL. Further, stockholding restrictions imposed by Government and slowdown in offtake from overseas customers (in PSRIPL) led to pile up of inventory, a large portion of which was funded through bank borrowings. However, the financial risk profile has gradually recovered in fiscal 2020 with sharp reduction in losses at PSRIPL, coupled with better realisations from domestic sugar and distillery businesses in addition to gradual liquidation in inventory at PSRIPL.

In addition to routine capex of about Rs.50-60 crore annually, the company is expected to incur capex of about Rs 150-200 crore in fiscals 2021 and 2022, towards setting up of new ethanol capacities by availing soft loans announced by the Government (which allows for interest subvention of 5 years including moratorium of 1 year).

Steady dividend flows from CIL, and possible proceeds of Rs.50-70 crore from sale of land are expected to help lower volatility in operational cash flows. While short term debt levels at EID Parry are expected to remain range bound, lower stocking at PSRIPL and long term debt repayments of ~Rs.330 crore in fiscals 2021 and 2022, are expected to lower consolidated debt levels by 5-10% over the medium term. Credit metrics are expected to remain at moderate levels.

EID Parry's liquidity is strong largely driven by the expectation of support from Murugappa Group. On standalone basis, EID Parry's liquidity is moderate, and fluctuates due to cyclical nature of the sugar business and high inventory levels during the fiscal year end. Liquidity is supported by access to large unutilized bank lines (about Rs. 500 crore estimated as of March 31, 2020), steady dividend inflows from CIL, and company's strong refinancing ability. The company has long term repayment obligations of around Rs. 115 crore in fiscal 2021, which is expected to be met through internal accruals. However, repayment obligations are expected to be higher at just over Rs. 300 crore in fiscal 2022; which is likely to be partly refinanced, as cash accruals may not suffice.
 
Nevertheless, 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. The company has also successfully refinanced its debt obligations in earlier years.

CRISIL believes EID Parry's credit metrics will remain moderate over the medium term, due to volatile operational cash flows in keeping with the cyclical nature of its sugar business, and only limited debt reduction. Steady dividend flow from CIL will continue to support cash flows. Support from Murugappa group is also expected to be forthcoming, if required.
 
Rating Sensitivity Factors
Upward Factors
* Improvement in business performance, resulting in higher cash generation in sugar operations, including at PSRIPL, and better contribution from by-products and ethanol facilities
* Better than expected reduction in debt levels to ~Rs.1300-1400 crores, which along with healthy cash generation, will materially improve credit metrics.  
 
Downward Factors
* Sharper than expected decline in sugar prices or sizeable increase in cane prices, impacting operating profitability and cash generation
* Slower than expected reduction in inventory or higher than expected capital expenditure leading to debt continuing at over Rs 1,850-1900 crore, further impacting credit metrics
* Reduction in financial flexibility due to sharp drop in value of holdings in CIL
* Deterioration in credit profile of the Murugappa Group or change in stance of support.

EID Parry is part of the Rs.36,900 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. EID Parry is a large integrated sugar producer. It has the capacity to crush 45,800 tonne per day (TPD) of sugarcane, co-generation plants of 160 megawatt capacity, distillery capacity of 234 kilo litre per day, and sugar refinery of 3000 TPD (through PSRIPL). The promoters held 45% stake in the company as on March 31, 2020.
 
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 has also established a 50:50 JV (Algavista) with Synthite Industries Private Limited (rated 'CRISIL AA-/Positive/CRISIL A1+'). The JV is involved in manufacturing value added algae products like Phycocyanin. EID Parry's investment in the JV is to the tune of Rs 11 crore.

On a standalone basis, EID Parry's net loss was Rs. 67 crores on operating revenues of Rs.1,267 crores for the first nine months of fiscal 2020, against net profit of Rs. 34 crores on operating revenues of Rs. 1,286 crores during the previous corresponding period.

Any other information: Not applicable