Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper of DCM Shriram Ltd (DCM).

 

The operating income declined by 5% to Rs.10,922 crores in FY24 from Rs.11,547 crores in FY23 mainly due to weak performance of Chloro Vinyl segment which was partly offset by healthy performance across sugar and other segments. Chloro vinyl segment reported 31% decline in its revenue due to fall in realisations for caustic soda and PVC resins. This has impacted the segment profitability as well leading to decline in overall EBIDTA margins to 9.1% in FY24 compared to 13.9% in FY23. In Q1-fiscal 2025, company reported revenue of Rs.2,876 crores with EBIDTA margins at 8.6%. With commissioning of 850 TPD caustic soda plant, CRISIL Ratings expects revenue growth to remain healthy at 8-10% mainly driven by incremental volumes from the newly commissioned capacity. Operating profitability is expected to improve to 10-12% in medium term supported by improved cost efficiency with commissioning of captive power plants. The revenue and profitability of DCM will continue to be supported by the diversity in the business profile.             

 

The company has completed its major capex plans which includes 850 TPD expansion in caustic soda and 120 MW power plant in Q1 fiscal 2025 while Hydrogen peroxide and Epichlorohydrin plant are under final stages of completion. The expansion project under sugar segment is expected to be completed this fiscal with studies underway for proposed Epoxy plant project. Gross debt is expected to increase towards the capex this fiscal. The financial risk profile should remain strong, despite the debt-funded capex, supported by expected steady cash accrual and healthy liquidity.

 

The rating continues to reflect a healthy and diversified business risk profile and strong financial risk profile of DCM, indicated by comfortable debt protection metrics, healthy capital structure and ample liquidity. These strengths are partially offset by risks related to volatility in the sugar, chlor-alkali and plastics segments and exposure to risks related to regulatory changes in the sugar and fertilizer industries.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of DCM and its associate and subsidiary companies considering the operational, managerial, and financial linkages between them.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy and diversified business risk profile: Chlor-alkali (caustic soda and chlorine) manufacturing is a part of the chloro-vinyl segment (chlor-alkali and plastics) along with polyvinyl chloride resins. The company is the second-largest domestic manufacturer of caustic soda, with capacity of 2,749 tonne per day at plants in Kota, Rajasthan, and Bharuch, Gujarat. Sustained price realisation, lower power cost driven by better efficiencies of captive power plants and large-scale operations ensured healthy operating margin over the past decade. Given its increased capacity and ability to generate large economies of scale, the company is expected to maintain its market position and operating efficiency over the medium term.

 

DCM owns and operates four sugar mills in Uttar Pradesh, with capacity of 41,000 tonne of cane crushed per day. Further, its 560-kilo litre per day distillery capacity and 166 MW of power, is expected to support segmental profitability and partially insulate the company from cyclicality in the sector. The government’s efforts to maintain sugar inventory balance in the country, thereby restricting/limiting exports and increasing the percentage of ethanol blending with petrol, should ensure stable profitability over the medium term.

 

The business risk profile also benefits from the company’s small-but-diversified presence across agricultural-related businesses (including Shriram Farm Solutions [SFS], fertiliser, and bioseed), cement and Fenesta windows.

 

• Strong financial risk profile: The financial risk profile is supported by comfortable debt protection metrics and healthy capital structure. Sustained profitability ensured comfortable interest coverage and net cash accrual to total debt ratios of over 13 times and 0.3 time, respectively, for fiscal 2024. Prudent funding of capacity expansion kept gearing below 1 time over the nine fiscals ended March 31, 2024. Capital structure should remain comfortable over the medium term despite partially debt funded capex. Any large, debt-funded capex or acquisition that weakens the financial risk profile will be monitorable.

 

Weaknesses:

• Volatility in the sugar, chlor-alkali, and plastics businesses: Profitability in the chlor-alkali and plastics businesses remains susceptible to international prices, exchange rate fluctuations, import duty levels, power cost and crude oil prices.

 

In the chemical segment, prices of caustic soda have declined significantly from Q1 fiscal 2024 onwards impacted by global slowdown affecting end user industries and significant capacity additions in the industry. In the Vinyl segment, profitability was impacted due to steep decline in prices of PVC resins in fiscal 2024 and dumping of resins by foreign players in the Indian market due to slowdown in global demand. Profitability margins for the segment are expected to improve in FY25 mainly due to cost initiatives taken by the company (i.e. cost of coal going down and benefit from in-house power generation unit). The company commissioned 120 MW power plant in June which will help manage its power cost. The recovery in prices would remain a key monitorable for the re stabilisation of realisations at DCM.

 

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 that adds to the sugar inventory levels may lead to fall in prices and impact profitability given that the cost of production is relatively sticky in nature. This downfall in sugar prices is cushioned by the measure of Central Government through fixation of minimum support price (MSP) of sugar, export restriction, increased ethanol prices and continued focus on increasing sugar diversion for ethanol production from the distillery operations.

 

• Exposure to regulatory risks: The sugar and fertiliser businesses are highly regulated. In sugar, the Government of India is empowered to fix the price paid to cane growers annually (Fair and Remunerative Price, or F&RP; earlier, it was called the statutory MSP). In some states, such as Uttar Pradesh, sugarcane pricing is controlled through the State Advised Price (SAP). A large gap between SAP and F&RP can expose Uttar Pradesh-based mills to the threat of imports from other states, though at present, this difference is small. Furthermore, a high SAP drives up the cost of production, which these mills have been able to partially offset using better cane variety, thereby improving their cane recovery rate. The government also announces an MSP for sugar every year, which supports the realisation of sugar. Furthermore, the government’s focus on increasing ethanol blending with petrol to 20% from the current 10% led to high demand for ethanol, leading to stable performance of the sugar business. The government also regulates the exports of sugar to meet the domestic demand. In fertiliser, both the input and output prices are controlled by the government.

Liquidity: Strong

Liquidity should remain healthy despite the ongoing capex. A prudent liquidity policy helps offset fluctuation in cash flow. CRISIL Ratings expects cash accrual to be Rs 800-1,200 crore per annum, against yearly debt obligation of Rs 170-190 crore over the medium term. Utilization of bank limits worth Rs 1,149 crore remained low for the 12 months through April 2024. Cash and equivalents were about Rs 680 crore as on June 30, 2024.

 

Environment, social and governance (ESG) profile

The ESG profile of DCM supports its strong credit risk profile.

 

Chemical manufacturers can have a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas emissions. The sector’s social impact is characterized by health hazards, leading to higher focus on employee safety and wellbeing and the impact on local community, given the nature of its operations. DCM has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights

• The Company participated in the Corporate Sustainability Assessment (CSA) by S&P Global for Dow Jones Sustainability Index (DJSI) and was ranked amongst the top 8% most sustainable companies out of 527+ global chemical companies.
• The company monitors its water, energy, and waste targets. The company took multiple initiatives to create a long-term impact of surface-water and groundwater which resulted in 3% reduction of specific water intensity (KL/ t production) in FY24 as compared to FY23.
• During the year, under the environmental sustainability initiative “KhushaliParyavaran”, at Kota, the Company organized trips for farmers to witness successful water management practices firsthand, inspiring innovation and promoting adoption of effective water conservation techniques through behavioural change, capacity building and community involvement. Through this initiative, 3.9 Lakh cubic meter of additional water storage created and 10+ villages have been enabled as water secure, impacting 20,000 people and 13,000 animals
• The Company stands committed to increasing the mix of green energy in its overall consumption of different energy sources. ~43% of the total direct power consumption is green power. Company is 12 times water positive.
• The governance structure is characterised by 50% of the board comprising independent directors, the presence of an investor grievance redressal mechanism and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of DCM to the ESG principle will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Rating Sensitivity factors

Downward factors:

• Lower-than-expected operating performance, leading to significant decline in the operating margin on sustained basis
• Significant weakening of the financial risk profile on account of any large, debt-funded capex or any acquisition leading to net debt-to-earnings before interest, taxes, depreciation, and amortisation increasing above 2 times on sustained basis

About the Company

DCM is a diversified business group, with presence across the chloro-vinyl (chlor-alkali and plastics), sugar and agricultural inputs (farm solutions; urea and bioseed) businesses. The company is also engaged in Fenesta building system and cement. It operates its chlor-alkali, plastics, urea, and cement businesses from Kota and chlor-alkali operations from Bharuch, where it has captive power plants. The company has four sugar mills in central Uttar Pradesh, with a bioseed division in Hyderabad.

Any other information: Not Applicable