Detailed Rationale

CRISIL Ratings’ on bank facilities of Parry Sugars Refinery India Pvt Ltd (PSRIPL) continues to reflect the company's strategic importance to and the operational, managerial and financial support from EID Parry (India) Ltd (EID Parry, rated ‘CRISIL AA/Stable/CRISIL A1+’). These strengths are partially offset by a weak financial risk profile, and susceptibility to volatile spreads in the sugar refining industry and to fluctuations in foreign exchange rates.

 

The ratings of PSRIPL are closely linked to the parent, EID Parry considering PSRIPL derives significant operational synergies and financial support from its parent. PSRIPL’s standalone operating performance remains modest marked by net loss of Rs 13 crore on net revenues of Rs.2046 crores in fiscal 2022, however losses have significantly reduced from Rs 139 crore (net revenue of Rs. 2251 crore) in fiscal 2021. 

Analytical Approach

For arriving at the ratings for PSRIPL, CRISIL Ratings has factored support from its parent, EID Parry. This is because PSRIPL is an integral part of EID Parry and will continue to receive operational, managerial, and financial support from the parent. Further, EID Parry has also supported PSRIPL in the past in the form of equity infusion and corporate guarantees and support is expected to be forthcoming over the medium term as well.

 

PSRIPL also has a Dubai based subsidiary, primarily established for sourcing customers for its sugar business. Operations are negligible and have not been consolidated.

Key Rating Drivers & Detailed Description

Strength:

• Strategic importance to, and operational and financial support from EID Parry: PSRIPL operates as an integrated unit of EID Parry and receives full management support from the parent. Both companies are engaged in the sugar business and also supply to institutional customers.

 

EID Parry increased its stake in PSRIPL to 99% in December 2012 and increased to 100% in September 2014. EID Parry infused Rs.58 crore of equity in March 2018; Rs 70 crore of equity in March 2019 and Rs 15 crore of equity in March 2020 in PSRIPL. EID Parry also infused Rs.400.0 cr in PSRIPL in the form of inter-corporate deposit (ICD) in FY21. The amount was used to retire existing long-term debt in PSRIL. Total outstanding in ICD stands at Rs.200.0 cr as on March 31, 2022. In the past, EID-Parry has also guaranteed the debt of PSRIPL. Besides, key managerial personnel from EID-Parry provide oversight to operations and finances of PSRIPL. CRISIL Ratings believes that PSRIPL will continue to receive operational, managerial, and financial support from EID Parry over the medium term.

 

Weaknesses:

• Susceptibility to volatile spreads in sugar refining industry and fluctuations in foreign exchange rates: The profitability in sugar refining exports business is dependent on the spread between the raw and white sugar, capacity utilization levels, and conversion cost. Since the start of operations in July 2014, the capacity utilization levels have gradually improved. By debottlenecking of the production capacity, PSRIPL has increased the melting rate from 2000 tonne per day (TPD) to 3000 TPD. The capacity utilisation is almost 95%. The company has taken steps towards profitability improvement such as process optimization and locking up the margins on the refined sugar sales in the international commodity exchanges. PSRIPL imports raw sugar predominantly sourced from Brazil, refines the same in the refinery in Kakinada and exports. The company also procures raw sugar from India, if there is an export quota allotted to the Sugar Mills, by the Government.

 

As the company buys and sells sugar predominantly in USD, significant amount of forex exchange fluctuations are mitigated by way of natural hedge. After an improvement in fiscal 2017, PSRIPL’s operating performance in fiscal 2018 and fiscal 2019 had been severely impacted due to weak global sugar prices, resulting in net losses. This was due to sizeable inventory losses following decline in global raw sugar prices.  However, the losses had reduced sharply in fiscal 2020 to Rs 19 crore compared with Rs 89 crore in fiscal 2019. This was due to recovery in global sugar prices till February 2020 following lower sugar production in Brazil amidst increasing diversion of Brazil’s sugar output towards ethanol manufacturing. Export of sugar picked up in fiscal 2021and company registered increase in revenue by 10% during the fiscal. Spread improved from ~USD 30-35 to USD 40-45. But due to one-time exceptional inventory loss, company reported PAT loss of Rs.138.0 cr. In fiscal 2022, PSRIPL improved on their operations and inventory management systems. Though its revenues are estimated to be 9-10% lower compared with fiscal 2021, operating profits are estimated at ~Rs.38.0 crore, while net loss is also lower at ~Rs.13 crore. Spread is expected to improve to ~USD 50-60/tonne depending upon the market demand. Owing to drastic increase in crude prices, Brazil’s diversion towards ethanol manufacturing is expected to increase further and only limited increase in sugar exports from Brazil is likely, despite higher sugar crop. The gap is expected to be filled by increase exports from Thailand, and about 8 million tonnes of sugar exports from India in SS 2023, compared with 10.5 million tonnes in SS2022. .

 

The company has improved their inventory management system which led to higher throughput leading to improvement in sugar conversion cost. Company has also implemented several debottlenecking initiatives to reduce cost and improve profitability. The benefits of these measures have already started to show in fiscal 2022 and are continuing in the first quarter of fiscal 2023. Global sugar prices have remain range bound thus far in fiscal 2023, and no material reduction is anticipated, given balance demand-supply dynamics. Higher volumes and stable profitability, will benefit cash flows for PSRIPL

 

• Weak financial risk profile: PSRIPL’s financial profile is weak, due to higher short-term debt of Rs 648 crores estimated as on March 31, 2022 and weak cash generation. The company completely  retired its external short term debt in April 2022 with support of ICDs received from EID-Parry.  Debt levels are expected to reduce gradually with liquidation of inventory and improvement in working capital management. 

 

Despite the improvement in performance in fiscal 2022, PSRIPL incurred net losses, owing to which its net-worth remained  negative as on March 31, 2022. Despite break-even at net level anticipated in fiscal 2023, and steady improvement thereafter, net worth is expected to remain negative over the medium term, in the absence of sizeable equity infusion Debt coverage metrics like interest cover improved to over 2 times in fiscal 2022, and is expected to witness gradual improvement in line with stabilized operating profitability. Debt levels are expected to remain between Rs.550-650 crores over the medium term, mainly comprising working capital loans.

Liquidity: Strong

PSRIPL’s liquidity is strong, largely driven by the expectation of support from the parent, EID Parry to provide ongoing and need based support, in case of exigencies. Albeit, on standalone basis liquidity is modest, due to low cash accruals  The company also has to repay ICDs of Rs.200 crore to EID-Parry by fiscal 2024, though the repayment terms may be extended in the event of liquidity tightness. Besides, , the company has strong refinancing capability owing to its association with EID Parry and being part of the Murugappa Group. Liquidity also benefits from adequate headroom available in the fund based bank limits of about Rs. 3000 crore, which have been utilized 25% on average, over the last 12 months ended March 2022. CRISIL Ratings believes that PSRIPL will continue to receive timely  financial support from EID Parry over the medium term.

Outlook: Stable

CRISIL Ratings believes PSRIPL will remain strategically important to EID Parry, and hence, will continue to receive strong operational, management and financial support from the parent over the medium term

Rating Sensitivity factors

Upward factors:

• Upward change in the credit risk profile of EID Parry by 1 notch or more could result in similar rating action on PSRIPL
• Higher than expected operating profitability, supported by a sharp recovery in global sugar prices, and material correction in debt levels, including through equity infusion, improving PSRIPL’s standalone credit profile

 

Downward factors:

• Downward change in the credit risk profile of EID Parry by 1 notch or more could result in similar rating action on PSRIPL
• Change in the support philosophy of EID Parry
• Very sharp decline in business performance and profitability, due to sharp reduction in  global sugar prices, leading to further weakening of debt metrics, and deterioration in standalone credit quality of PSRIPL

About the Company

PSRIPL, incorporated in 2006, has a sugar refinery with capacity of 2000 tpd, and a 35 mega-watt (MW) captive power plant in a special economic zone in Kakinada (Andhra Pradesh). The company was earlier known as Silk Road Sugar Private Limited as a joint venture between EID Parry and Cargill Asia Pacific Holdings Pte. Ltd. In December 2012, EID Parry increased its stake in PSRIPL to 99% from 50% by acquiring 49% stake of Cargill Asia Pacific Holdings Pte. Ltd for Rs.36 crores and subsequently changed the name of the company to Parry Sugars Refinery India Private Limited (PSRIPL). In the absence of gas as fuel, the management opted to use coal as fuel. The company installed a 10 MW coal boiler at a cost of Rs.63.5 crores. The refinery recommenced operations with a coal-fired boiler in July 2014.

 

The company has made substantial improvements in the sugar manufacturing process thereby reducing the refined sugar conversion cost. The company has also undertaken debottlenecking of the process and by which the company has increased the sugar melting rate from 2000 TPD to 3000 TPD. Further, the company has been locking up the margins by locking the price of the raw sugar and white sugar in the international commodity exchanges. PSRIPL imports raw sugar predominantly sourced from Brazil, refines the same in the refinery in Kakinada and exports. The company also procures raw sugar from India, if there is an export quota allotted to the Sugar Mills, by the Government.  As the company buys and sells predominantly in USD, the significant amount of forex exchange fluctuations are mitigated by way of natural hedge. The company sells its white sugar to institutional customers in overseas markets and has also received quality certifications from Halol and Bonsucro.

 

The company has also expanded its operations through its subsidiary Parry International DMCC, based out of Dubai, UAE.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Crore)	Complexity Levels	Rating Assigned with Outlook
NA	Fund Based Facility	NA	NA	NA	270	NA	CRISIL A+/Stable
NA	Fund Based Facility#	NA	NA	NA	840	NA	CRISIL A+/Stable
NA	Non Fund Based Limit*	NA	NA	NA	1890	NA	CRISIL A1

*Fully Interchangeable with fund based facility

#Interchangeable with Non Fund Based facility