| The Ugar Sugar Works Limited | ||||
| Rating Reaffirmed and Withdrawn | ||||
| Rating Action | ||||
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| 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Ratings has reaffirmed its rating on the long-term bank facilities of The Ugar Sugar Works Ltd (TUSWL) and subsequently withdrawn the rating at the request of the company and on receipt of no objection certificate from lenders. The withdrawal is in line with the CRISIL Ratings policy on withdrawal of bank loan ratings.
The rating continues to reflect the extensive experience of the promoters in the sugar industry, the integrated operations of the company and its improving financial risk profile. These strengths are partially offset by susceptibility to cyclicality in the sugar business, and to regulatory changes such as movement in fair and remunerative prices (FRP) and minimum selling price (MSP) for sugar, and a modest financial risk profile.
The business risk profile is improving driven by growing diversity and healthy profitability from the distillery division, with ethanol produced being supplied at remunerative prices for blending with gasoline. The commencement of additional distillery capacity of 645 kilolitre per day (KLPD; overall distillery capacity of 845 KLPD) coupled with sales of surplus carryover sugar inventory in fiscal 2023 resulted in growth of 57% on-year in revenue to Rs 1,800 crore. The company has opted for direct route (cane juice/syrup route) for ethanol production during crushing season. However, with lower cane crushing during sugar season 2023 leading to lower sugar production, and thus lower sugar sales, company’s revenue was lower at Rs 188 crore in the first quarter of fiscal 2024, as against Rs 335 crore in the corresponding period of fiscal 2023.
Operating margin increased to 11.9% in fiscal 2023 from 8.8% in fiscal 2022 on account of rising share of ethanol in sales as it fetches higher margins than sugar. However, the operating margin was lower at 3.3% during the the first quarter of fiscal 2024, as against 7.3% in the corresponding period of fiscal 2023, mainly owing to lower absorption of fixed overheads. The company had to incur certain pre-operative expenses to operationalise the grain-based distillery plant, which impacted the operating margin.
The financial risk profile continues to be healthy aided by increasing profitability and lowering of debt on account of reduced closing sugar inventory. Tangible networth and gearing stood at Rs 220 crore and 1.58 times, respectively, as on March 31, 2023, as against Rs 121 crore and 5.30 times, respectively, a year earlier. Debt protection metrics were comfortable, with interest coverage ratio at 4.4 times in fiscal 2023, against 2.3 times in fiscal 2022. Liquidity was also comfortable with cash accrual at Rs 118 crore in fiscal 2023 and cash surplus of Rs 19 crore as on March 31, 2023. |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of TUSWL. |
Key Rating Drivers & Detailed Description Strengths: Extensive experience of the promoters: The promoters have been in the sugar business for several decades; the first unit was set up in 1939, with sugarcane crushing capacity of 500 tonne per day (TCD). The company has survived several downturns and has expanded its capacity to 18,500 TCD. This includes a fully integrated distillery capacity of 845 KLPD and cogeneration capacity of 59.5 MW as on March 31, 2023.
Improving operating efficiency owing to integrated operations: Integrated operations mitigate the volatility in profitability of the sugar division. The distillery division will partly offset the cyclicality in the sugar business owing to fixed and higher remunerative prices for ethanol as well as ethanol production from grain-based route during offseason. Furthermore, the operating margin is expected to improve as ethanol is a higher margin product. In the cogeneration segment, the company has power purchase agreements with a few distribution companies in Karnataka and the per unit realisation rate for power will remain stable.
Weakness: Susceptibility to regulatory changes and volatility in sugar prices: Given the inherent cyclicality in the sugar industry, domestic players remain vulnerable to volatile sugar prices, which are driven by production levels. Any change in sugar prices can adversely impact the profitability of millers. The government also regulates the domestic demand-supply situation through its policies on sugar and cane prices, trade and subsidies.
The recent fall in sugar prices was cushioned by the MSP declared by the government (Rs 31/kg). Movement in cane prices will continue to be a key monitorable. However, integrated players, such as TUWSL, are less likely to face a major impact as distillery and cogeneration plants will lend stability to margins. Additionally, demand for ethanol continues to be strong with the increased offtake by oil marketing companies to meet the ethanol blending norms of 20% by 2025. Government interventions, however, will continue to drive profitability of sugar mills and will remain a key rating sensitivity factor.
Modest financial risk profile: The financial risk was constrained by high total outside liabilities to tangible networth ratio. However, the ratio has been improving over the last five fiscals driven by better accrual and prepayment of long-term debt obligation. Further, reduction in short-term debt on account of lower closing inventory has aided improvement in gearing and debt protection metrics. Debt protection metrics will improve over the medium term with healthy profitability and small debt. |
Liquidity: Adequate Net cash accrual of Rs 118 crore in fiscal 2023 sufficiently covered debt obligation. The company had cash and equivalent of Rs 19 crore as on March 31, 2023. Liquidity will remain adequate supported by improvement in cash accrual, cushion in bank limit and funding support from the promoters. |
Outlook: Positive CRISIL Ratings believes TUSWL will continue to benefit from the extensive experience of its promoters and the management’s commitment to provide timely support in case of exigencies. The distillery segment will drive increase in revenue as well as operating margin. The financial risk profile will improve, supported by steady growth in cash accrual and lower debt. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company Set up in 1939, TUSWL is one of India's oldest sugar mills. The company has a fully integrated setup with crushing capacity of 16,000 TCD, 44-MW power plant and 845-KLPD distillery in Ugarkhurd, Karnataka. It also has a 2,500-TCD capacity and 15.5-MW power plant in Jewargi, Karnataka. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||
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Criteria Details
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