| Harinagar Sugar Mills Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
|
CRISIL has reaffirmed its ratings on the bank facilities of Harinagar Sugar Mills Limited (HSML) at 'CRISIL BBB/Negative/CRISIL A3+'. |
| Key Rating Drivers & Detailed Description |
|
Strengths * Operating efficiency driven by integrated operations HSML has sugarcane crushing capacity of 10,000 tonne crushed per day (TCD) and has integrated its operations through the addition of a distillery and co-generation plant, with capacities of 50,000 litre per day (lpd) and 14.5 megawatt (MW), respectively. HSML has been able to fully utilise its by-products such as molasses and bagasse. The integrated facility leads to diversification of revenue profile offsetting cyclicality in the sugar business. It generated revenue of Rs86 crore from distillery operations and Rs26 crore from cogeneration during fiscal 2017. The distillery segment had an EBITDA margin of 48.4% in fiscal 2017 while the cogeneration segment generated an EBITDA margin of 20.9% in fiscal 2017. Steady revenue from high-margin cogeneration and distillery businesses partially offsets the weak profitability of sugar business during down cycle. The decline in sugar profitability in fiscal 2019 and 2020 is expected to be partially mitigated by increase in contribution from distillery and cogeneration segments. Sugar segment is expected to make losses in fiscal 2019 as the sugar prices are expected to remain around Rs28-29 per kg whereas the cost of production is expected to be around Rs31 per kg. Sugarcane crushing in fiscal 2019 and 2020 is expected to be much higher than fiscal 2018 at around 170 lakh quintals (against 146 lakh quintals in fiscal 2018) leading to increase in contribution from distillery and cogeneration divisions cushioning decline in operating profitability. Any further decline in sugar prices would lead to higher losses and remains a key rating sensitivity factor. * Promoters' experience in the sugar industry HSML has been managed by the Pittie family for the past 80 years. The promoters have extensive experience in the sugar industry and have successfully managed operations through economic cycles. Furthermore, the management has enhanced and integrated the capacity of the sugar mill, ensuring good growth over the years. The business is currently being managed by Mr Vivek Pittie who has over 25 years of experience in the business. The fourth generation Mr. Vedang Pittie and Mr. Pragyan Pittie (sons of Mr. Vivek Pittie) have also joined the business. CRISIL believes the promoters' industry experience will continue to drive HSML's business growth over the medium term. Weaknesses * Susceptibility to regulatory changes and inherent volatility in sugar prices The sugar industry is susceptible to movements in sugar prices which results in volatile profitability. 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. Regulatory mechanisms and dependence on monsoons have also rendered the sugar industry cyclical. The sugar production is expected to increase by 32% year-on-year (y-o-y) to around 30 million tons in SS 2017-18 whereas the consumption is expected to remain at around 25 million tons. In anticipation of a bumper sugar crop in sugar season 2017-18, sugar prices have declined to ~Rs.28/kg in April 2018, from around Rs.37/kg in September, 2017 while cane prices too have been increased in keeping with interests of farmers. To lower the impact on sugar mills, and in turn limit the growth in cane dues to farmers, the government increased import duty on raw and white sugar to 100%, and placed restriction on sugar sales by imposition of stockholding limits for February and March 2018. Also, the government in March 2018, removed the 20% export duty on sugar and allowed export of 2 million tons of sugar, in a bid to encourage exports. In May, the government also came up with subsidy of Rs5.5 per quintal of sugarcane crushed with minimum export quota given to mills to avail the subsidy. Hence, government interventions will be remain a driver for the profitability of sugar mills and continue as a key rating sensitivity factor * Modest financial risk profile The financial risk profile of HSML is expected to weaken with decline in profitability in fiscal 2019 leading to low liquidity and weak debt protection metrics. The total debt is expected to be high at around Rs340 crore at the end of fiscal 2018 against a networth of around Rs230 crore. The long term debt is expected to be around Rs132 crores with short term debt of around Rs207 crores. With low accruals, the repayments of the company of over Rs30 crores in each of the next 2 fiscals are expected to be under pressure. However, HSML has access to bank lines which are expected to support the liquidity over the medium term. The company has access to bank lines of Rs280 crores which had an average utilization of 68% for the 12 months ending February, 2018. The company also had cash equivalents in the form of marketable securities worth Rs14 crores as on March, 2018. Debt protection metrics improved in fiscal 2017 due to high sugar prices with interest coverage and net cash accrual to total debt ratios (NCATD) improving to 6.32 times and 17% from 1.73 times and 4%, respectively. However the interest coverage and NCATD are expected to decline to around 3 times and 11% in fiscal 2018 and further decline in fiscal 2019 due to reduction in profitability. |
| Outlook: Negative |
|
CRISIL believes HSML's profitability is likely to remain weak in fiscal 2019 due to decline in sugar prices because of high sugar production in sugar season 2018. The rating may be downgraded if profitability continues to remain low over the medium term due to low sugar prices or if debt increases due to larger working capital requirement, or sizeable capital expenditure thereby leading to significant decline in key credit metrics. Conversely, the outlook maybe revised to 'Stable' if the profitability of the company improves due to supportive measures taken by central or state governments in the form export subsidy or reduction in cane prices leading to higher than anticipated cash accruals. |
| About the Company |
|
HSML was incorporated in 1933. The company had an initial crushing capacity of 600 TCD at its factory in West Champaran (Bihar). Over the past 80 years, the company has expanded the cane crushing capacity to 10,000 TCD, and recently integrated its operations with adding 50,000 lpd distillery capacity, and setting up a 14.5 MW co-generation power plant. HSML also undertakes sugarcane farming on a plot of around 3000 acre near the factory. |
| Key Financial Indicators | ||||||||||||||||||||||||
|
|
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) | ||||||||||||||||||||||||||||||||||||||||||
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
| For further information contact: | ||||||
|