Key Rating Drivers & Detailed Description

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 845 KLPD and cogeneration capacity of 59.5 MW as of December 31, 2022. 

Improving operating efficiencies due to integrated nature of operations: CRISIL Ratings believes the integrated nature of operations partially offsets volatility in profitability of the sugar division. The distillery division will partly offset the cyclicality in the sugar business given the fixed and higher remunerative prices for ethanol as well as ethanol production from grain based route during offseason. Going ahead, company’s distillery segment is expected to contribute to over 50% of overall revenues from existing 10-20%. Further operating margins are expected to improve as ethanol is higher margin product in comparison to current sugar prices. In the cogeneration segment, the company has power purchase agreements with few distribution companies in Karnataka and the per unit realisation rates for power exported is expected to remain stable in range of Rs.4.5 in fiscal 2023.

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. 

The downfall in sugar prices is cushioned by the MSP declared by the Government of India (Rs 31/kg at present). The movement in cane prices will continue to be a key monitorable. However, integrated players, such as TUWSL, are less likely to face any major impact as distillery and co-generation plants will lend stability to margins. Additionally, demand for ethanol continues to be strong with oil marketing companies increased offtake to meet the ethanol blending norms of 20% by 2025. Government interventions, however, will continue to remain a driver for profitability of sugar mills and continue as a key rating sensitivity factor.

Moderate financial risk profile: Financial risk remains partly constrained by high TOL/TNW and moderate debt protection metrics. However, the same has been gradually improving over the last 4 fiscals due to better accruals and prepayment of higher cost long term debt. Further, with the reduction in short term debt on account of lower closing inventory will aid in further improvement in gearing. Hence, gearing is expected to improve to less than 2x over the medium term.

Debt protection metrics are expected to improve over the medium term with healthy profitability and lowering debt.  Net Cash Accruals to Total Debt (NCATD) and Interest Coverage ratios are expected to remain above 0.3 times and 4 times respectively over the medium term.

Key Financial Indicators

Annexure - Details of Instrument(s)

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