Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Parry Sugars Refinery India Private Limited (PSRIPL) at ‘CRISIL A+/Stable/CRISIL A1.

 

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

 

PSRIPL’s revenue grew by 40% in fiscal 2023, driven by higher volumes and better spreads in the international market, despite operations being disrupted for 40-45 days, due to two accidents at its refining plant. Prices of white sugar continued to remain elevated in fiscal 2024 resulting in revenue growth of 40% yoy in the first half of fiscal 2024 (H1FY24). Volume on year on year basis also grew 14% in H1FY24. Revenue is expected to grow by 27-30% in fiscal 2024, while operating profitability is also expected to improve to 2-2.5% with higher volumes and firm international sugar prices.

 

The company’s financial risk profile deteriorated in fiscal 2023, due to the losses (though reducing) resulting in continued negative net worth, impacting leverage metrics. Losses are expected to reduce but continue over the medium term, impacting leverage metrics. The company’s interest coverage ratio also turned negative due to operating losses in fiscal 2023 but is expected to improve to ~1 time in fiscal 2024 due to better profitability, and dip slightly over the medium term as international sugar prices moderate.

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 commodity trading business and also sourcing customers for its sugar business. Operations are not significant and have not been consolidated.

Key Rating Drivers & Detailed Description

Strengths:

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 holds 100% stake in PSRIPL since September 2014. Furthermore, PSRIPL had outstanding non-convertible debentures (NCDs) and term loan guaranteed by EID Parry aggregating to Rs. 200 crores with repayments over fiscals 2022-2023 which had been completely redeemed through support from EID Parry in the form of inter corporate deposits (ICDs) of Rs 400 crore in fiscal 2021; further, the parent infused Rs.58 crore of equity in March 2018; Rs 70 crore in March 2019 and Rs 15 crore in March 2020 in PSRIPL. In addition, EID Parry has also given letter of comfort to some of the lenders of PSRIPL, for working capital facilities, availed by the latter.

 

CRISIL believes that PSRIPL will continue to receive operational, managerial, and financial support from EID Parry over the medium term. The current outstanding in the ICD from EID Parry is Rs 200 crore as on September 30, 2023, and any payment against the same due by fiscal 2025, could be extended due to modest standalone liquidity profile of PSRIPL and as payout against demurrage charges incurred by its customers need to be completed this fiscal.

 

Weaknesses:

Susceptibility to volatile spreads in sugar refining industry and fluctuations in foreign exchange rates

The profitability in sugar refining 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 tons per day (TPD) to 3000 TPD. The capacity utilization is almost 80-85%. 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 US dollars, significant amount of forex exchange fluctuations is 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 the decline in global raw sugar prices.  However, the losses had reduced sharply in fiscal 2020. 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. However, decline in global sugar prices in March 2020, following COVID-19 outbreak led to mark to market losses on the inventory carried, in turn leading to overall losses for the fiscal. In fiscal 2023, while spreads were favorable, the two accidents in August 2023 and delay in shipments to customers impacted its profitability, as high demurrage costs had to be borne. Besides, some raw materials were also damaged and increased coal prices impacting profitability. In fiscal 2024, international sugar prices have remained firm leading to better realization and stable coal prices expected to lead to better operating efficiency. International sugar prices are expected to moderate in fiscal 2025 due to more balanced global-demand supply, marginally impacting profitability of PSRIPL.

 

Sub-par financial risk profile

 PSRIPL’s financial profile is sub-par due to large losses in the past and in fiscal 2023, constraining its net worth as well as leverage metrics. The company reduced external debt during fiscal 2021 by liquidation of inventory and by utilizing ICDs extended by EID Parry. There is no long-term debt in the company except for the above mentioned ICDs from parent, EID Parry.

 

PSRIPL’s debt protection metrics weakened in fiscal 2023 with interest coverage ratio turning negative due to operating losses. Total financial cost was also higher due to higher interest cost and working capital limit utilization. External debt reduced to Rs 34 crore as on September 30, 2023 compared to Rs 614 crore as on March 31, 2023. However, leverage metrics will remain adverse due to negative net-worth. Interest coverage ratio is expected to improve to ~1 time from being negative in fiscal 2023, in the near term with improving operating profits, and then dip marginally. No major capex spend is likely to be incurred.

Liquidity: Adequate

PSRIPL’s liquidity is adequate, largely driven by the expectation of support from the parent, EID Parry, as has been demonstrated in the past. While standalone liquidity will continue to be modest due to low accruals, the company has no external long-term debt obligations with all external long-term debt been retired. ICDs from EID Parry are expected to have a flexible repayment schedule to avoid pressure on cash flows of PSRIPL Liquidity also benefits from adequate headroom available in the working capital bank limits of about Rs. 3000 crore. The working capital limit was utilized 61% on an average in the past 12 months. The company has to pay significant portion of the demurrage charges incurred in fiscal 2023, to its customers; the same is expected to be paid out of cash generated and additional debt, and possible support from EID Parry in fiscal 2024.

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, leading to an improvement in PSRIPL’s credit profile

 

Downward factors:

• Downward change in the credit 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 and timing of support to PSRIPL
• Very sharp decline in business performance, due to subdued global sugar prices, leading to further weakening of debt metrics

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, earlier known as Silk Road Sugar Private Limited, was set-up 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 Halal and Bonsucro.

 

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

 

About the Parent, EID Parry (India) Ltd

EID Parry is part of the Rs. 75,000 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. 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 140 megawatt, distillery of 417 kilo litres per day, and sugar refinery of 3000 TPD (through PSRIPL). The promoters held 44% stake in the company as on March 31, 2023.

Key Financial Indicators

Particulars	Unit	2023	2022
Revenue	Rs.Crore	2868	2046
Profit After Tax (PAT)	Rs.Crore	(254)	(13)
PAT Margin	%	(8.8)	(0.6)
Adjusted debt/adjusted networth	Times	N.M.	N.M
Interest coverage	Times	(1.33)	2.24

N.M – Not Meaningful

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 Facilities	NA	NA	NA	175	NA	CRISIL A+/Stable
NA	Fund-Based Facilities*	NA	NA	NA	1915	NA	CRISIL A+/Stable
NA	Non Fund Based Limit	NA	NA	NA	550	NA	CRISIL A1
NA	Non Fund Based Limit^	NA	NA	NA	360	NA	CRISIL A1

*Fully Interchangeable with non-fund based facility

^Fully interchangeable with fund based facilities