| The Ugar Sugar Works Limited | ||||
| Rating upgraded to 'CRISIL BB+/Stable' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||
| Detailed Rationale |
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CRISIL has upgraded its rating on the long-term bank facilities of The Ugar Sugar Works Limited (Ugar Sugar) to 'CRISIL BB+/Stable' from 'CRISIL BB/Stable.' |
| Analytical Approach |
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For arriving at its ratings, CRISIL has considered the standalone business and financial risk profile of Ugar Sugar's. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Extensive experience of the promoters in the sugar industry: The management has been engaged in the sugar business for several decades; the first unit was set up in in 1939, with capacity of 500 Tonnes Crushed per Day (TCD). Since then, the company has survived several downturns and has grown its scale to 18,500 TCD. This includes a fully integrated distillery capacity of 75 KLPD and cogeneration capacity of 59.5 MW as of March 2020. * Integrated nature of operations: CRISIL believes the integrated nature of operations partially offsets volatility in profitability of the sugar division. The distillery segment is likely to sustain healthy profitability over the medium term, backed by healthy sugarcane production and stable price of molasses. In the cogeneration segment, the company has signed power purchase agreements with few distribution companies in Karnataka in fiscal 2018. The per unit realisation rates for power exported will range from Rs 4.5 to Rs 5 in fiscal 2021, as compared to around Rs 4-4.5 per unit estimated in fiscals 2019-2020 and be eligible for annual price escalations. Weaknesses: * Susceptibility to regulatory changes and volatile sugar prices: Given the inherent cyclicality in the sugar industry, domestic players remain vulnerable to volatile sugar prices, which are driven by the production levels. Any change in sugar prices can adversely impact profitability of millers. The government also regulates the domestic demand-supply situation through its policies on sugar and cane prices, trade, and subsidies. While, industrial usage, which accounts for nearly two-thirds of the annual demand of ~26 million tonne, will be impacted as several food manufacturing units including soft beverages, chocolates, confectionery, bakeries, hotels, restaurants and cafes are running at low capacities, companies with lower exposure to institutional sales are likely to be less affected. As a result, while overall domestic demand is expected to be lower by 1.5-2 million tonne in the current sugar season (SS) 2020 (refers to the period October 1, 2019 to September 30, 2020), the company's performance is less likely to be impacted severely. However, oil marketing companies may reduce ethanol off-take because the lockdown due to the pandemic has lowered demand for petrol and diesel. Besides, they have limited storage capacity available. Production of potable alcohol from ethanol will also be impacted because of lower demand from distillers. Third, international sugar prices have fallen ~23% between January and May 2020 as large supplier-nations, including Brazil, are switching from ethanol to sugar due to slack global oil demand and low crude oil prices. Thus, exports from India are likely to remain flattish compared with a 25-30% growth expected earlier. In the milieu, sugar inventory becomes the key monitorable. India had started SS 2020 with an opening stock of 14.5 million tonne. However, despite ~20% lower production, the closing inventory is likely to be high at 12.8-14 million tonne that's equal to six months' consumption because of slack industrial demand and exports. The saving grace in fiscal 2021 for domestic sugar mills is the MSP of Rs 31 per kg fixed by the government. But for this, sugar realisations would have fallen further, given high stocks. Consequently, lower accruals and higher inventory, are expected to lead to elevated debt levels, especially on working capital front, for most sugar producers. With sugar output expected to increase by atleast 15-20% in SS2021, performance for most sugar players is expected to remain subdued in fiscal 2022 as well. * Moderate but improving financial risk profile: Financial risk remains moderate marked by high gearing. However, the same has gradually improved over the last 2 fiscals through fiscal 2020 due to better accruals and progressive reduction in long term debt. Consequently gearing has reduced from a peak of 8.3 times in FY18 to an estimated 6.7 times in FY20. Gearing is expected to improve further to less than 5 times over the medium term due to nominal capex and further reduction in long term debt. Debt protection metrics, albeit modest, are expected to gradually improve over the medium term, with expected improvement in cash generation and tapering interest expenditure. Net Cash Accruals to Total Debt (NCATD) and Interest Coverage ratios improved from -0.1 times and -0.6 times in fiscal 2018 to an estimated 0.1 times and 1.6 times respectively in fiscal 2020 and is likely to improve further to over the medium term. |
| Liquidity Stretched |
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The company has repayment obligations of around Rs 21 Cr in fiscal 2021 and Rs 44 Cr in fiscal 2022 and is expected to be tightly matched with internal accruals of around Rs 35-45 Cr per annum. Cash and equivalents are also not expected to be significant. However, utilization of fund based working capital limits of Rs 490 crore have reduced to an average of 75% in fiscal 2020 from earlier high levels of over 85% owing to relatively lower inventory holdings compared to previous fiscal. This in turn provides headroom for liquidity in case of any exigencies. CRISIL draws comfort from the expected improvement in accruals, cushion available in in bank limits, and funding support available from the promoters. |
| Outlook: Stable |
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CRISIL believes Ugar Sugar will continue to benefit from the extensive experience of its promoters, and the management's commitment to provide timely support, in case of exigencies. |
| Rating Sensitivity factors |
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Upward factors: * Sustained growth in revenues of over 10% in the medium term resulting in operating margins being maintained at over 9% * Substantial reduction in inventory with corresponding correction in debt levels; resulting in improvement in leverage and credit metrics; interest coverage ratio improving to over 3 times; and gearing improving to less than 2.5 times Downward Factors: * Sustained fall in revenues of over 10% in the medium term and operating margins falling below 4% on sustained basis * Large debt funded capex or higher than expected increase in working capital in turn further affecting leverage and credit metrics; for instance, interest cover falling below 1.2 time in the medium term |
| About the Company |
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Established in 1939, Ugar Sugar is one of India's oldest sugar mills. The company has a fully integrated set-up with crushing capacity of 12,500 TCD, a 44-MW power plant, and 75-klpd distillery in Ugarkhurd, Karnataka. It also has a 2500-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: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| 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 various bank facilities | ||||||||||||||||||||||||||||||
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| For further information contact: | ||||||
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