Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and fixed deposits of The Sukhjit Starch and Chemicals Limited (SSCL) at ‘CRISIL A+/Stable/CRISIL A1’.

 

The ratings continue to reflect the strong market position of SSCL as a leading manufacturer of starch and its derivatives in the domestic maize processing industry. The ratings also factor in the extensive industry experience of the promoters along with the strong operational track of the company and its diverse and reputed clientele. The financial risk profile remains robust due to strong debt protection metrics and healthy leverage. These strengths are partially offset by susceptibility to volatility in raw material prices and moderate scale of operations.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SSCL and factored in the debt of subsidiary Sukhjit Mega Food Park & Infra Ltd (SMFP), which is guaranteed by SSCL.

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in the domestic maize processing industry

The company was established in 1943 and has a strong track record of operations. It has a maize grinding capacity of 1,600 tonne per day (TPD) and near to double digit share in the domestic market based on installed capacity. The facilities are strategically located across North, South, and Eastern parts of the country, in proximity to source the key raw material, maize. Further, different weather conditions in stated regions allow steady procurement of maize throughout the year at competitive prices, providing additional edge to SSCL to price its products. The market position is further supported by the extensive industry experience of key promoters, Sardana family, and company’s vintage in the industry. Resultantly, business has benefitted from the promoters’ sound understanding of the industry and healthy relations with customers and suppliers. Further, with steady demand from all end-user segments such as packaging, FMCG and pharmaceuticals, SSCL booked revenue of Rs 1350 crore in fiscal 2024, however same remains lower than fiscal 2023 (Rs. 1435 crores) due to decline in realization but there is volumetric growth of ~5%. Going forward, the company is likely to benefit from increase in business from existing customers as well as new customers.

 

Diversified and reputed clientele

Revenue depends on the product mix, which varies according to the demand and market prices of finished products. A major proportion of the starch output goes to the paper, packaging, and food and beverages industries. Derivatives such as glucose and sorbitol are used in the food and beverages and pharmaceutical sectors whereas by-products are used in the poultry and cattle feed and partly in the food industry as maize oil. The clientele is diversified with the top five customers contributing 16% to overall revenue in the three fiscals through 2024. The customer profile includes reputed brands such as Dabur India Ltd, Heinz India Pvt Ltd, Nestle India Ltd and Marico Ltd.

 

Robust financial risk profile

The capital structure is supported by strong capital structure backed by steady accretion to reserve along with low dependence on external debt for working capital requirements. Networth has improved significantly over the past 2-3 years to Rs 540-545 crore as on March 31, 2024 and is expected to improved further backed by steady accretion to reserve and limited dividend outgo. Debt protection metrics stood comfortable in the past due to steady rise in operating profitability and shall remain healthy over the medium term as well; interest coverage and net cash accrual to adjusted debt ratios are expected at 4-6 times and 0.3-0.4 time, respectively, during fiscal 2024. The absence of debt-funded capital expenditure will aid the financial metrics over the medium term.

 

Weaknesses:

Operating margin susceptible to volatility in raw materials prices and regulatory changes

Operations are susceptible to the inherent risks associated with agriculture-based commodity business, such as availability of raw materials, fluctuation in prices, and changes in government regulations. Cost of maize forms 70% of the operating income. When the price of maize falls significantly, the government implements minimum support prices at which maize should be sold in the market to protect farmers' interests. This impacts the cost of procurement of maize. Due to high fluctuation in raw material prices, the profitability also impacted to 9.3% in fiscal 2024 as against 10% in fiscal 2024. However, with stabilization of raw material prices, backed by improved capacity utilisation, economies of scale and input price pass on arrangement with end customers, profitability is expected to improve to 10-11% but it will remain susceptible to any sharp volatility in maize prices. Going forward, a sustained increase in operating profitability amid improved volumes will remain a key monitorable.

 

Moderate scale of operations:

Revenue decline during fiscal 2024 to Rs. 1371 crores from Rs. 1435 crores in fiscal 2023 due to decline in realization as price of maize corrected in fiscal 23-24 which impacted the realization. However, there is a volumetric growth of ~5%. Further, revenue is expected to improve both in value and volumetric term supported by steady demand from all end-user segments such as packaging, FMCG and pharmaceuticals. However, scalability will remain constrained on account of higher utilisation of existing capacities, hence any further growth over the medium term will require timely capacity expansion and its stabilization thereafter, along with steady realizations. With expected capacity expansion of around 400 tonne per day, expected over fiscals 2025, SSCL will be able to accommodate more demand, however, the timely commencement of stated capacities and offtake arrangements with counter parties will remain a monitorable.

Liquidity: Strong

Bank limit utilisation is at around 92 percent for the past twelve months ended May 2024. Cash accrual are expected to be over Rs 80-85 crore which are sufficient against term debt obligation of Rs 25-26 crore over the medium term. In addition, it will act as cushion to the liquidity of the company. Current ratio is moderate at 1.34 times on March 31, 2023.The promoters are likely to extend support in the form of equity and unsecured loans to meet its working capital requirements and repayment obligations.

Outlook: Stable

CRISIL Rating believes SSCL will continue to benefit from its established market position backed by long-standing industry presence and healthy industrial relations, robust financial risk profile due to low-to-moderate dependence on external debt.

Rating Sensitivity Factors

Upward factors

• Timely commencement of new capacities leading to sustained volume growth of over 30-40% and hence an improved market share in the maize processing industry
• Efficient management of commodity related risks and improved negotiations with end consumers leading to sustained growth in operating profitability at over 12-14%
• Sustenance of financial risk profile at healthier levels amid business growth

 

Downward factors

• Weaker-than-expected operating profitability (below 8%), impacting net cash accrual and liquidity.
• Significant impact on debt metrics and return on capital employed due to more-than-expected debt on account of sizeable capex or stretch in working capital cycle.

About the Company

The Sukhjit Starch and Chemicals Pvt ltd (SSCL) was incorporated in the year 1943 promoted by Sardana family and its associates. The company is primarily engaged in the processing of maize (corn) and manufacturing of starch, its derivatives (liquid glucose, Sorbitol 70%, monohydrate dextrose, dextrin, etc) and other by-products.

About the Group

SSCL was incorporated in 1943 by the Sardana family and associates. The company primarily manufactures starch, its derivatives and other by-products. SSCL has four operational manufacturing units - at Nizamabad in Telangana, Malda in West Bengal, Tahiwal in Himachal Pradesh and a new unit in Phagwara inside the mega food park, which became operational in November 2020. Its overall maize grinding capacity is 1,600 TPD.

 

SMFP is a special purpose vehicle (SPV) formed to set up and operate a mega food park which was commissioned in November 2020. The SPV will develop plots for setting up food processing units including for integrated milk processing units, canning, ready to serve juices and beverages, dal and rice milling, instant traditional foods and starch extraction. It will generate revenue by leasing these plots to companies and levying user charges for common core infrastructure facilities.

Any other information: Not Applicable