Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the long-term bank facilities and debt instruments of Balrampur Chini Mills Ltd (BCML).

 

The ratings continue to reflect the company’s dominant market position in north India, established relationships with farmers, diversified revenue profile, superior operating efficiency and strong financial risk profile. These strengths are partially offset by susceptibility to cyclicality in the sugar business and regulatory changes, including movement in the state advised price (SAP) for cane in Uttar Pradesh, minimum selling price (MSP) for sugar or other regulations around distillery operations.

 

The business risk profile continues to remain strong driven by growing diversity and healthy profitability from the distillery division, with ethanol produced being supplied at remunerative prices for blending with gasoline. Lower fluctuations in ethanol prices, which are linked to price of sugarcane, have mitigated the volatility in performance of the sugar business.

 

Revenue moderated ~4% in fiscal 2023 because of lower sugarcane availability and sugar recovery owing to adverse weather conditions and red rot disease in sugar season (SS) 2022. However, with SS2023 witnessing growth in sugar production, the company booked revenue of Rs 2,929 crore during the first half of fiscal 2024, a growth of ~33% on-year. The distillery segment recorded volume growth with sales of 16.22 crore bulk litre (BLs) in the first half of fiscal 2024 compared with 9.30 crore BLs in the corresponding period of the previous fiscal. Apart from volumes, the company benefitted from improved realisations across both sugar and distillery segments. Operating margin stood at 11.2% in the first half of fiscal 2024 (1.3% in the first half of fiscal 2023).

 

With the beginning of SS2024, cane crushing is expected to be higher by ~8% in fiscal 2024. This combined with better recovery rates and restriction on diversion towards ethanol will result in higher sugar production during the second half of fiscal 2024. However, with growth in consumption at 2-3% and stable sugar sales volume, sugar inventory is expected to increase. Overall operating margin is expected at ~14% over the medium term.

 

Capital structure was healthy supported by adjusted networth of Rs 2,700 crore (reported networth was Rs 2,875 crore as on March 31, 2023) and gearing of 0.70 time as on March 31, 2023. Capital expenditure (capex) of Rs 100-200 crore per annum will be undertaken over the medium term towards maintenance capex. The capex will be funded entirely through internal accrual. Debt metrics will remain comfortable led by healthy profitability as well as reduction in debt. CRISIL Ratings expects the interest coverage ratio at  above 6 times over the medium term and total outside liabilities to adjusted networth (TOLANW) ratio below 1 time.

Analytical Approach

CRISIL Ratings has followed capital allocation approach and arrived at the adjusted networth of BCML by knocking off the investment in Auxilo Finserve Pvt Ltd (Auxilo; ‘CRISIL A/CRISIL PPMLD A/Positive’), wherein BCML currently holds 37.15% stake. As on September 30, 2023, the investment was valued at Rs 175 crore.

Key Rating Drivers & Detailed Description

Strengths:

Established market position and diversified revenue profile 

BCML is one of the largest sugar producers in India with crushing capacity of 80,000 tonne per day (TPD) of sugarcane, exportable (surplus) power capacity of 175.7 MW and distillery capacity of 1,050 kilo litre per day (KLPD). The company has 10 sugar factories: eight in eastern Uttar Pradesh and two in central Uttar Pradesh, thus having access to a large market in north India. One of the distilleries of 320 KLPD commissioned in SS2023 can operate on dual feed, sugarcane syrup during the crushing season and B-heavy and C-heavy molasses / grains during the off-season, ensuring full utilisation of the capacity and aiding profitability.

 

Fully integrated operations enable all supplementary businesses associated with sugar, such as distillery and power, to be major contributors to profitability, and largely de-risk the sugar business. The distillery business offers higher and stable profit and returns, compared with the sugar business, and thus, helps moderate the impact of cyclicality inherent in the sugar business. Additionally, initiatives by the government pertaining to ethanol blending have moderated the sugar business cyclicality to a large extent. Ethanol prices are a function of sugarcane prices and cost of production of sugar; thus, there is little chance of the same being lowered. In addition, increase in the fair and remunerative price (FRP) of cane will lead to a corresponding increase in ethanol price.

 

CRISIL Ratings believes the company will continue to benefit from its dominant market position in the sugar industry and fully integrated operations. The diversified revenue stream will continue to offset the cyclicality in sugar business.

 

Superior operating efficiency 

The operating efficiency of the company emanates from its fully integrated operations, sizeable contribution to profitability from higher margin distillery segment, healthy sugar recovery rates and high capacity utilisation leading to better absorption of fixed cost. The distillery capacity is adequate to utilise the molasses produced through crushing operations and the cogeneration segment can cater to the entire power requirement during the crushing season from the bagasse produced, resulting in fully integrated facilities.

 

The company has been continuously engaging with farmers to produce an early variety of cane along with implementing varietal change, which has more sucrose content, and hence, fetches higher sugar recovery rates. Increasing use of early variety of cane has helped pre-diversion recovery rate rise to 11% and beyond since fiscal 2019 (though lower in fiscal 2022 owing to adverse weather conditions and red rot disease), vis-a-vis 9.5-10% over fiscals 2013 to 2015. High recovery rates can lower the cost of production, making the credit profile less susceptible to increase in cane prices or fall in sugar prices.

 

The overall operating profitability will be supported by the distillery segment, which fetches higher margins, with increase in its share from 19% in fiscal 2022 to 26-31% over the medium term. EBIDTA margin is expected to be stable at ~14% in the near term with expected increase in cane prices, which will be partly offset by rise in sugar prices as well as the annual hike in ethanol prices announced by the government of India (GoI) and oil marketing companies (OMCs) (in case of ethanol through grain route) over the last few years.

 

Strong financial risk profile 

The financial risk profile continues to be strong supported by healthy capital structure and adequate debt protection metrics. Debt increased in fiscal 2023 mainly to part fund the capex programme for setting up distilleries, sugar refineries and modernisation of sugar units. These term loans comprise soft loans under the state and central government schemes at subsidised interest rate of 4-5%. The utilisation of working capital limits is expected to increase in the near term to fund the increase in inventory.

 

Nevertheless, overall debt metrics will remain comfortable supported by healthy operating performance and significantly low-cost loans. Interest coverage and net cash accrual to adjusted debt ratios are expected to remain healthy over the medium term at above  6 times (11.8 times in fiscal 2023) and 0.2-0.4 time (0.19 time in fiscal 2023), respectively. The TOLANW ratio, which was 0.94 time as on March 31, 2023, is expected below 1 time over the medium term. CRISIL Ratings believes the leverage of BCML will continue to be characterised by limited debt. Any growth plans resulting in sizeable long-term debt will remain a key rating sensitivity factor.

 

The company has been buying back its shares at regular intervals though amounts have not been material. Significant outgo on account of buy-back of shares or material increase in dividend payout or capital reduction will also be a monitorable.

 

Weaknesses:

Susceptibility to downturns in the sugar business

Sugar prices are largely market-driven and dependent on production for the sugar season and inventory levels prevailing in the country. Hence, higher production, which increases inventory, may lead to steep fall in prices and impact profitability severely as the cost of production is relatively sticky in nature. Monsoons too have a bearing on cane production and recovery rates of cane, impacting overall sugar production in the country. Fall in sugar prices is cushioned by the MSP declared by GoI (Rs 31 per kg at present). The government has promoted export to address excess inventory and arrest fall in prices in the past.

 

BCML may not be impacted by sugar down-cycles, given its superior operating efficiency, increasing contribution of the distillery segment and integrated nature of operations.

 

Exposure to regulatory risks

While sugar prices are market-driven, the government is empowered to fix the price paid to cane growers annually. Sugarcane pricing is controlled through SAP in Uttar Pradesh, which is higher than the FRP. Though a higher SAP increases the cost of production for UP based mills, varietal re-balancing, characterised by better recovery rates, reduces the impact considerably for players such as BCML. The profitability of the company, mainly for its sugar segment, remains vulnerable to material changes in the SAP and other regulatory changes in the sugar industry.

 

GoI had showcased the intent to fasten the move to an ethanol-based economy by advancing the 20% ethanol blending target (with gasoline) to 2025 from 2030. However, it has recently put a capping on sugar sacrifice at 1.70 MT on account of lower production of sugar in the country. Moreover, it has been raising ethanol prices every fiscal in addition to differential pricing for B-Heavy and the direct cane juice route, and providing interest sops on loans for setting up ethanol-based distilleries. Hence, change in the regulatory stance of the government or its support to the sugar sector (including distilleries and ethanol pricing) are key monitorables.

Liquidity: Strong

Fund-based working capital line of ~Rs 2,000 crore was utilised 52% on average for the 12 months through November 2023. Utilisation may increase in the near term owing to higher working capital requirement. Expected cash accrual of Rs 380-480 crore per annum over the medium term will sufficiently cover yearly debt obligation of Rs 65-275 crore and annual capex of Rs 100-200 crore.

 

ESG profile

CRISIL Ratings believes the environment, social and governance (ESG) profile of BCML supports its already strong credit risk profile.

The sugar industry has moderate impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also moderate considering the impact of operational activities on employees. The company is focusing on mitigating environmental and social risk.

 

Key ESG highlights:

• Energy consumption and greenhouse gas (GHG) emission intensity as percentage of revenue increased in fiscal 2023 as against the previous fiscal. However, the company is taking several steps for reduction in GHG emissions and energy conservation such as investing in lower steam consumption through installation of SRTC (short retention time clarifier) units and optimising imbibition of water quantity for increasing crushing rate for maximum efficiency of equipment at full crush rate.
• Gender diversity improved in fiscal 2023 but remained lower than the sector average. The company regularly engages in conducting workplace inspections and analysing incident reports, and utilises job safety analysis techniques to identify work-related hazards and assess risk.
• Attrition rate increased in fiscal 2023 but was lower than the sector average.
• The governance profile is characterised by 57% of its board comprising independent directors and presence of robust internal control systems and processes. The company has extensive disclosures.

 

Its commitment to ESG and integrating sustainability principles throughout its organisation and value chain will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook: Stable

CRISIL Ratings believes BCML will continue to benefit from its established market position, superior operating efficiency of the sugar business and increasing contribution from the more stable and higher margin distillery business. Moreover, the financial risk profile should remain strong, with healthy debt metrics.

Rating Sensitivity factors

Upward factors

• Substantial increase in cash accrual driven by improvement in business diversity and establishing market leadership across multiple segments
• Sustenance of strong financial risk profile and improvement in debt metrics, with the TOLANW ratio below 0.4 time on sustained basis
• Healthy build-up of cash surplus

 

Downward factors

• Significant decline in cane crushing volume owing to adverse monsoon or pest attack, fall in contribution from the ethanol business and increase in raw material prices, or adverse government regulations, impacting profitability and cash generation
• Large, debt-funded capex or acquisition or material infusion into the non-banking financial company (NBFC) associate (Auxilo) impacting the financial risk profile and debt metrics, with the TOLANW ratio in excess of 1.5 times

About the Company

BCML is one of the largest integrated sugar manufacturers in India. The Saraogi family members, promoters, held 42.9% stake in the company as on September 30, 2023. Operations are forward integrated, into manufacturing ethanol, using molasses (a by-product of sugar), and power, using cogeneration from bagasse. It has 10 sugar manufacturing units, 5 distillery plants and 10 cogeneration units spread across eastern and central Uttar Pradesh. It has cane crushing capacity of 80,000 TPD, 1,050 KLPD of distillery and 175.7 MW of saleable cogeneration capacity.

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 level	Rating assigned with outlook
NA	Commercial paper	NA	NA	7-365 days	900	Simple	CRISIL A1+
INE119A07017	Non-convertible debentures	27-Feb-2023	3-month TBill +165bps	27-Feb-2026	140	Complex	CRISIL AA+/Stable
NA	Long Term Loan	NA	NA	Dec-2024	87.65	NA	CRISIL AA+/Stable
NA	Cash Credit@	NA	NA	NA	1600	NA	CRISIL AA+/Stable
NA	Cash Credit*	NA	NA	NA	200	NA	CRISIL AA+/Stable
NA	Cash Credit$	NA	NA	NA	200	NA	CRISIL AA+/Stable
NA	Term loan	NA	NA	June-2027	360	NA	CRISIL AA+/Stable
NA	Proposed Working Capital Facility	NA	NA	NA	357.66	NA	CRISIL AA+/Stable

@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