| The Sukhjit Starch and Chemicals Limited | ||||||
| Long-term rating upgraded to 'CRISIL A+/Stable' | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facilities and fixed deposits of The Sukhjit Starch And Chemicals Limited (SSCL) to ‘CRISIL A+/Stable’ from ‘CRISIL A/Positive’. The rating on the short-term facilities has been reaffirmed at ‘CRISIL A1’.
The rating upgrade reflects the established market position of SSCL in the domestic maize processing industry resulting in the steady improvement in its business risk profile, indicated by sustained improvement in both revenue and operating profitability. On the back of capacity expansion and its timely stabilisation, revenue grew by around 66% in fiscal 2022 over fiscal 2021, driven by both volumetric growth and improved realisation, marking a compound annual growth rate of 16% over the three fiscals through 2022. With steady demand from all end-user segments such as packaging, fast moving consumer goods (FMCG) and pharmaceuticals., SSCL booked revenue of Rs 705 crore during April-September 2022 and is expected to report Rs 1400 crore for fiscal 2023. Though operating margin moderated in the first half of the fiscal due to high commodity and overhead prices, it is expected to stabilise in the second half on account of lower raw material (maize) prices, due to commencement of harvesting season. Overall, operating margin shall remain range bound at 11-12% in fiscal 2023 and thereafter, driven by established market position of SSCL enabling pass through of sharp commodity price increase to end consumers and expected economies of scale amidst steady business growth; operating profitability is estimated at 10.8% during April-September in fiscal 2023.
The ratings also factor in the company’s robust financial risk profile, aided by sizeable networth and low reliance on external debt. Working capital requirement remains efficiently managed leading to timely liquidation of inventory and realisation of payment from debtors, thereafter, hence keeping the reliance on working capital debt low at 50-60%. The absence of debt-funded capital expansion plans along with sizeable accretion to reserve shall further strengthen the financial risk profile over the medium term. Liquidity, on the other hand, also remains supported by sizeable net cash accrual against maturing debt, cushion in bank lines, unencumbered cash reserve and prudent working capital management.
The ratings reflect the strong market position of SSCL as a leading manufacturer of starch and its derivatives in the domestic maize processing industry. The ratings also factor in the extensive industry experience of the promoters along with the strong operational track of the company and its diverse and reputed clientele. The financial risk profile remains robust due to strong debt protection metrics and healthy leverage. These strengths are partially offset by susceptibility to volatility in raw material prices and moderate scale of operations. |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of SSCL and factored in the debt of subsidiary Sukhjit Mega Food Park & Infra Ltd (SMFP), which is guaranteed by SSCL. |
Key Rating Drivers & Detailed Description Strengths: Strong market position in the domestic maize processing industry: The company was established in 1943 and has a strong track record of operations. It has a maize grinding capacity of 1,600 tonne per day (TPD) and around 12% share in the domestic market based on installed capacity. The facilities are strategically located across North, South, and Eastern parts of the country, in proximity to source the key raw material, maize. Further, different weather conditions in stated regions allow steady procurement of maize throughout the year at competitive prices, providing additional edge to SSCL to price its products. The market position is further supported by the extensive industry experience of key promoters, Sardana family, and company’s vintage in the industry. Resultantly, business has benefitted from the promoters’ sound understanding of the industry and healthy relations with customers and suppliers. Hence, capacity utilisation remains high, and its regular offtake has led to compound annual growth in revenue of 16% over the three fiscals through 2022. Further, with steady demand from all end-user segments such as packaging, FMCG and pharmaceuticals, SSCL booked revenue of Rs 705 crore during April-September 2022 and is expected to report Rs 1400 crore for fiscal 2023, an estimated 25% growth over fiscal 2022.
Diversified and reputed clientele: Revenue depends on the product mix, which varies according to the demand and market prices of finished products. A major proportion of the starch output goes to the paper, packaging, and food and beverages industries. Derivatives such as glucose and sorbitol are used in the food and beverages and pharmaceutical sectors whereas by-products are used in the poultry and cattle feed and partly in the food industry as maize oil. The clientele is diversified with the top five customers contributing 15% to overall revenue in the three fiscals through 2022. The customer profile includes reputed brands such as Dabur India Ltd, Heinz India Pvt Ltd, Nestle India Ltd and Marico Ltd.
Robust financial risk profile: The capital structure is supported by strong capital structure backed by steady accretion to reserve along with low dependence on external debt for working capital requirements. Networth has improved significantly over the past 2-3 years to Rs 424 crore as on March 31, 2022 and is expected to further augment to around Rs 500 crore as on March 31, 2023, backed by steady accretion to reserve and limited dividend outgo. Debt protection metrics stood comfortable in the past due to steady rise in operating profitability and shall remain healthy over the medium term as well; interest coverage and net cash accrual to adjusted debt ratios are expected at 7-8 times and 0.5-0.6 time, respectively, during fiscal 2023. The absence of debt-funded capital expenditure will aid the financial metrics over the medium term.
Weaknesses: Operating margin susceptible to volatility in raw materials prices and regulatory changes: Operations are susceptible to the inherent risks associated with agriculture-based commodity business, such as availability of raw materials, fluctuation in prices, and changes in government regulations. Cost of maize forms 70% of the operating income. When the price of maize falls significantly, the government implements minimum support prices at which maize should be sold in the market to protect farmers' interests. This impacts the cost of procurement of maize. Though SSCL has shown a steady increase in operating profitability over the three fiscals through 2022 backed by improved capacity utilisation, economies of scale and input price pass on arrangement with end customers, profitability will remain susceptible to any sharp volatility in maize prices. Going forward, sustained increase in operating profitability amid improved volumes will remain a key monitorable.
Moderate scale of operations: Though scale of operations has improved over the years, it is expected to remain moderate at around Rs 1400 crore in fiscal 2023; Rs 705 crore booked during April-September 2022. Scalability will remain constrained on account of higher utilisation of existing capacities, hence any further growth over the medium term will require timely capacity expansion and its stabilisation thereafter, along with steady realisations. With expected capacity expansion of around 400 tonne per day, expected over fiscals 2024 and 2025, SSCL will be able to accommodate more demand, however, the timely commencement of stated capacities and offtake arrangements with counter parties will remain a monitorable. |
Liquidity: Strong Expected annual cash accrual of Rs 90-100 crore should comfortably cover yearly debt obligation of Rs 20-25 crore and support liquidity. Because of prudent working capital management, bank limit utilisation remains moderate at 58% over the 12 months through November 2022, providing sufficient cushion to encounter exigencies and any sharp increase in input prices. Low gearing and healthy networth provide further financial flexibility. Current ratio stood moderate at 1.26 times as on March 31, 2022 and is expected at 1.3-1.4 times as on March 31, 2023. |
Outlook: Stable SSCL will continue to benefit from its established market position backed by long-standing industry presence and healthy industrial relations, robust financial risk profile due to low-to-moderate dependence on external debt. |
Rating Sensitivity factors Upward factors * Timely commencement of new capacities leading to sustained volume growth of over 30-40% and hence an improved market share in the maize processing industry * Efficient management of commodity related risks and improved negotiations with end consumers leading to sustained growth in operating profitability at over 12-14% * Sustenance of financial risk profile at healthier levels amid business growth Downward factors * Weaker-than-expected operating profitability (below 8%), impacting net cash accrual and liquidity * Significant impact on debt metrics and return on capital employed due to more-than-expected debt on account of sizeable capex or stretch in working capital cycle. |
About the Company SSCL was incorporated in 1943 by the Sardana family and associates. The company primarily manufactures starch, its derivatives and other by-products. SSCL has four operational manufacturing units―at Nizamabad in Telangana, Malda in West Bengal, Tahiwal in Himachal Pradesh and a new unit in Phagwara inside the mega food park, which became operational in November 2020. Its overall maize grinding capacity is 1,600 TPD.
SMFP is a special purpose vehicle (SPV) formed to set up and operate a mega food park which was commissioned in November 2020. The SPV will develop plots for setting up food processing units including for integrated milk processing units, canning, ready to serve juices and beverages, dal and rice milling, instant traditional foods and starch extraction. It will generate revenue by leasing these plots to companies and levying user charges for common core infrastructure facilities. |
Key Financial Indicators
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||
|
This Annexure has been updated on 30-Jan-2023 in line with the lender-wise facility details as on 02-Feb-2022 received from the rated entity.
Criteria Details
|