Detailed Rationale

CRISIL Ratings has revised its outlook on long term ratings of Balrampur Chini Mills Limited (BCML) to ‘Positive’ from ‘Stable’ while reaffirming the long term ratings at 'CRISIL AA’. The Commercial paper has been reaffirmed at CRISIL A1+.

 

The outlook revision reflects expected improvement in the business risk profile of the company over medium term owing to increasing contribution from stable and higher margin distillery segment, continued superior operating efficiencies of sugar segment, active government support to the industry as well as further improvement in financial risk profile. 

 

For fiscal 2021, the company is estimated to have posted marginally higher operating margins as compared to 14.5% in fiscal 2020 and similar revenues. The improvement of operating margin was on account of higher contribution from stable and higher margin distillery segment as well as continued healthy profitability in the sugar segment. Company’s 160 Kilo litres per day (KLPD) distillery commissioned in 4th quarter of fiscal 2020, operated for full fiscal 2021 leading to higher contribution to revenues and profitability. The impact of pandemic was minimal as all three divisions i.e. Sugar, Distillery and Cogeneration were under “”essential services” and operated throughout the fiscal.

 

The contribution from distillery segment to the overall operating profitability is expected to increase to over 50-55% over next few fiscals from ~40% in fiscal 2020 as the company is setting up a new distillery of 320 KLPD which is expected to commission in December 2022. This distillery will operate on duel feed i.e. sugarcane juice during the season while on grains during off-season leading to utilization of the same throughout the fiscal aiding the profitability. Also, even in distillery segment, the contribution from higher profitable “B-Heavy route” has been increasing leading to improvement in profitability. This coupled with continued healthy operating profitability is expected to improve the overall operating profitability of the company from 14.5% in fiscal 2020 to over 16% over medium term. 

 

The Government of India (GoI) too has showcased the intentions to fasten the move to ethanol based economy, by advancing the 20% ethanol blending target from 2030 to 2025. Additionally, the government has supported through rise in ethanol prices every fiscal apart from differential pricing for B-Heavy and Direct Cane Juice route as well as interest subsidies on loans for setting up distilleries. With increase in diversion to ethanol over next few years, the sugar inventory in the industry is expected to remain stable with downward trend, thereby keeping the sugar realisations stable and reducing the volatility, which will aid the profitability of sugar division.

 

Any change in regulatory stance and continuation of government support to sugar sector (including distilleries) will remain key monitorable.

 

The financial risk profile continues to be healthy. The company is expected to generate cash accruals of Rs 500-700 crore per annum over medium term as against the expected repayments of Rs 100-110 crore per annum. The capital expenditure over next couple of fiscals is expected to be ~Rs 500 crore (mainly comprising of Rs 425 crore on the proposed 320 KLPD new distillery). Liquidity profile is healthy reflected in average bank limit utilization of 30% of sanctioned limits (44% of the drawing power) over past twelve months ended March 2021. The capital structure has improved over the years due to healthy cash accruals, limited capital expenditure and reduction in debt levels, for instance, the ratio of total outside liabilities to adjusted Networth (TOL/ANW) is estimated to have improved sharply to ~0.7 times in fiscal 2021 from ~1.2 times in fiscal 2019 and is expected to improve further to below 0.5 times in couple of fiscals. 

 

The ratings reflect the company's dominant market position in North India, established relationship with farmers, diversified revenue profile, superior and improving operating efficiencies and comfortable financial risk profile. These strengths are partially offset by susceptibility of its business performance to cyclicality in the sugar business and to regulatory changes such as change in state advised price (SAP) of cane in Uttar Pradesh (UP) or in minimum selling price (MSP) for sugar.

Analytical Approach

CRISIL Ratings has arrived at the adjusted Networth of the company by knocking off the investment in Auxilo Finserve Private Limited (CRISIL A/Stable/CRISIL A1), wherein BCML holds 45.05% stake.

Key Rating Drivers & Detailed Description

Strengths:

* Established market position and diversified revenue profile: 

BCML is a large integrated sugar producer in India. It has the capacity to crush 76,500 tonne per day (TPD) of sugarcane, and exportable (surplus) power capacity of 165.2 MW and distillery of 520 kilo litre per day (KLPD). BCML is the second largest player in terms of scale on a pan-India basis. It has ten sugar factories eight in eastern UP and two in central UP and being present in UP, has access to a larger North India market. The company expanded its distillery capacity by 160 KLPD which commenced operations in January 2020. The company is in the process of further expanding the distillery capacity from 520 KLPD to 840 KLPD by setting up a new distillery of 320 KLPD which is expected to be commissioned in December 2022. This distillery will operate on dual feed i.e. sugarcane juice during the season while on grains during off-season leading to utilization of the capacity throughout the fiscal aiding the profitability. 

Fully integrated operations enable all supplementary businesses associated with sugar, such as distillery and power, to become major contributors to profitability, and de-risk the sugar business model to a large extent. Distillery business offers much higher and stable profits and returns, compared with the sugar business, and thus, help moderate impact of cyclicality the inherent in the sugar business. Additionally, the initiatives by Government for increasing diversion of sugarcane to ethanol instead of sugar as well as encouragement for export of sugar has moderated the sugar business cyclicality to large extent and the same is expected to continue in future. Also BCML is diverting more cane towards producing B-heavy molasses which will lead to higher Ethanol production. Owing to the same the dependence on exports will come down eventually. Moreover, the Ethanol prices are function of sugarcane price and cost of production of sugar, thus there is little chances of the same being lowered. In addition, any increase in FRP will lead to corresponding increase in Ethanol price. Further, increased Ethanol production and sacrifice of sugar will lead to improved working capital cycle

CRISIL believes that the company will continue to benefit from its dominant market position in the sugar industry and diversified revenue streams will continue to offset the cyclicality in sugar business.

 

* Superior and improving operating efficiencies: 

BCML's superior operating efficiencies emanate from its fully integrated nature of operations, increasing contribution to profitability from higher margin distillery segment, better sugar recovery rates and higher capacity utilisation leading to better absorption of fixed costs. The company's distillery as well as co-generation capacity is adequate to utilise all the molasses and bagasse produced through the crushing operations thereby resulting in fully integrated facilities.

Also, the company has been continuously engaging with the farmers to produce early variety of cane which has higher sucrose content and resultantly higher sugar recovery rates. Increasing use of early variety of cane has resulted in an improvement in sugar recovery rates from 9.5% to 10% witnessed over fiscal 2013 to fiscal 2015 to 11% and beyond in fiscal 2019 and fiscal 2020. High recovery rates can lower cost of production considerably making BCML's credit profile less susceptible to increase in cane prices or fall in sugar prices. Moreover, sugarcane yield per acre is also higher for early variety of cane which will boost capacity utilisation of BCML and support the performance in distillery and cogeneration businesses as well.

The operating profitability is further supported with increase in profitability in high margin distillery segment over the years, increasing from 14% in fiscal 2017 to 40% in fiscal 2020. The distillery segment is estimated to enjoy operating margin of 50% in fiscal 2021. The profitability is aided by increase in ethanol pricing by Government of India every fiscal over last few fiscals. Also even in distillery segment, the contribution from higher profitable “B-Heavy route” has been increasing leading to improvement in profitability. The proportion of profitability from distillery segment increasing from 40% and sustenance of it over 50% will be key rating driver.

 

Further the company's scale of operations at each of its facilities is such that the company is able to derive benefits of the economies of scale, which is reflected in its lower than industry cost of production.

CRISIL Ratings believes that BCML's operating performance will continue to be supported by its superior efficiencies and fully integrated nature of operations.

* Comfortable financial risk profile: 

The company's financial risk profile is characterised by low term debt, strong debt protection metrics and healthy liquidity. Absence of any significant debt funded capex since fiscal 2008 and continuous debt repayment has resulted in a decline in the term debt levels of the company which is estimated at below Rs 400 crore in March 2021. These term loans consist of soft loans under state and central government schemes carrying subsidized interest rate of 4-5%.

Healthy operating performance and controlled debt coupled with significantly low interest rate on these loans supports the overall debt protection metrics of the company. The company had an interest coverage ratio and net cash accruals to debt ratio of 7.82 times and 37% respectively for fiscal 2020 and estimated at over 13 times and around 40% for fiscal 2021. The debt protection metrics is expected to continue to be healthy over medium term with limited dependence on term debt.

CRISIL believes that BCML's capital structure will continue to be characterised by controlled debt. Any growth plans resulting in a sizeable term debt will remain a key rating sensitivity factor.

 

Weakness:

* Susceptibility of business performance to downturn in the sugar business

Sugar prices are largely market driven and are dependent on production for the sugar season and inventory levels prevailing in the country. Hence, higher production which adds to the sugar inventory levels may lead to steep fall in prices and impact profitability severely given that the cost of production is relatively sticky in nature. Dependence on monsoons have also rendered the sugar industry cyclical as monsoons have a bearing on cane production and recovery rate of cane impacting the sugar production in the country. This downfall in sugar prices is cushioned by the measure of Central Government through fixation of Minimum Support Price of Sugar which at present is Rs. 31/kg.

 

Additionally, government has taken measures to encourage increased diversion of sugarcane to ethanol instead of sugar and to promote exports in order to address the excess inventory situation in the country and arrest the fall in prices. Also the impact of sugar down-cycles on BCML is expected to be lower given its superior operating efficiencies, increasing contribution of distillery segment and integrated nature of operations.

 

* Exposure to regulatory changes in the sugar industry: 

While sugar prices are market driven, the government is empowered to fix the price paid to cane growers annually. Sugarcane pricing is controlled through the SAP in UP which is currently higher than the Fair and Remunerative Price (F&RP; earlier the statutory minimum price). Though a higher SAP results in a higher cost of production for UP based mills, increasing use of early variety of cane which are characterised by higher recovery rates reduces the difference considerably for players such as BCML. Hence BCML's profitability remains vulnerable to changes in the SAP and other regulatory changes in the sugar industry.

Liquidity: Strong

Liquidity is supported by sanctioned fund based working capital limit of Rs 2153 crore which was utilized to the extent of 30% (44% of the drawing power) on an average during last 12 months ended March 2021. The company has repayments of Rs. 100-110 crore over Fiscal 2022 & 2023 as against expected cash accrual of Rs. 500 - 700 crore. The capital expenditure over next couple of fiscals is expected to be ~Rs 500 crore (mainly composed of the capex on the new distillery). Company plans to fund ~Rs 220 crore from banks under interest subvention scheme of Government of India (at interest rate of ~4%) and remaining through internal accrual. 

Outlook: Positive

CRISIL Ratings believes BCML will continue to benefit from its established market position and superior operating efficiencies of sugar business and increasing contribution from the more stable and higher margin distillery business. Moreover, the company's financial risk profile is expected to remain comfortable with moderate capital spending, supporting healthy debt metrics. 

Rating Sensitivity factors

Upward factors

* Reduction in variability of profits as a result of further improvement in cost efficiencies or structural changes in sugar industry

* Improvement in diversity with increase in proportion of distillery with stable and higher profitability, for instance, contribution in profitability from ethanol improving to 50% on sustained basis

* Sustenance of comfortable financial risk marked by minimal term debt; TOL/ANW sustained below 1 time

 

Downward factors

* Sharp drop in sugar and distillery realisations impacting profitability, including due to government regulations

* Large debt funded capital expenditure or acquisition impacting the company's financial risk profile; TOL/ANW in excess of 2.25-2.5x times

About the Company

BCML is one of the largest sugar producers in India. The operations of the company are forward integrated, manufacturing ethanol, using molasses' a by-product of sugar, and power, using cogeneration from bagasse,  generated out of sugar manufacturing. Its facilities consist of ten sugar mills in Uttar Pradesh with a combined capacity of 76,500 tonnes per day (TPD) of sugarcane, 520 kilo litres per day (KLPD) of distillery and 165.2 megawatt [MW] of saleable cogeneration capacity. The Saraogi family, the promoters, held 41.21% of the company's equity capital as on December 31, 2020.

 

Net profit was Rs 232 crore on net sales of Rs 3792 crore for the nine months ended December 31, 2020, against a net profit of Rs 274 crore on net sales of Rs 3001 crore for the corresponding period of the previous fiscal. 

Key Financial Indicators(Consolidated)

As on / for the period ended March 31	Unit	2020	2019
Revenue	Rs crore	4744	4411
Profit after tax (PAT)	Rs crore	510	575
PAT Margin	%	10.7	13.0
Adjusted debt/Adjusted networth	Times	0.68	0.85
Interest coverage	Times	7.82	15.25

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity Level	Rating Assigned with Outlook
NA	Commercial Paper	NA	NA	7-365 days	1200	Simple	CRISIL A1+
NA	Long term loan	NA	NA	June 2024	130.24	NA	CRISIL AA/Positive
NA	Cash Credit^	NA	NA	NA	1003	NA	CRISIL AA/Positive
NA	Cash Credit^	NA	NA	NA	500	NA	CRISIL AA/Positive
NA	Cash Credit*	NA	NA	NA	200	NA	CRISIL AA/Positive
NA	Cash Credit**	NA	NA	NA	300	NA	CRISIL AA/Positive
NA	Cash Credit**	NA	NA	NA	150	NA	CRISIL AA/Positive

^Interchangeable with non-fund based facility of Rs 50 crore

*Interchangeable with non-fund based facility of Rs 40 crore

**Interchangeable with non-fund based facility of Rs 15 crore