RATING RATIONALE
06May2021
Oswal Overseas Ltd.
Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs. 55.00 Crs. of Oswal Overseas Ltd.
Particulars| Facilities** | Amount(Rs.Crs.) | Tenure | Rating# | |
|---|---|---|---|---|
| Fund Based | 53.00 | Long Term |
BWR B
/Stable Assignment |
|
| Non Fund Based | 2.00 | Short Term |
BWR A4
Assignment |
|
| Grand Total | 55.00 | (Rupees Fifty Five Crores Only) | ||
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure RATING ACTION / OUTLOOK
The assigned rating takes into account the weak financial profile of Oswal Overseas Limited (OOL) marked by its modest scale of operations and losses in the past mainly because of high cane procurement costs, which has constrained its liquidity position. The rating also factors in the vulnerability of the company’s profitability to volatility in sugar prices. BWR further notes the inherent cyclicality in the sugar industry and the company’s exposure to agro-climactic risks related to cane production. The rating, however, factors in the extensive experience of the promoters in the sugar industry and the Government support to the sugar industry in the form of soft loans and subsidies, among others.
The 'Stable' outlook has been assigned on account of consistent growth in turnover over last 3 years and the company's ability to service its debt obligations from personal resources in spite of low internal cash accruals.
Credit Strengths:
-
Extensive experience of the promoters in the sugar industry :
Oswal overseas limited (OOL) is mainly involved in manufacturing sugar. Its sugar manufacturing unit with its 3,500 tonne crushed per day (TCD) capacity is located in the Bareilly district of Uttar Pradesh. The operations of the company are managed mainly by Mr. Paramjeet Singh, who has more than 30 years of experience in various business segments including more than 15 years of experience in the sugar industry.
-
Favourable plant location with healthy cane availability :
The company’s plant is located in Bareilly, Uttar Pradesh , an area which is one of the largest producers of sugarcane in the country. The plant has been operating at a capacity utilization of more than 65% during FY20 which increased to around 82% in FY21 owing to the adequate availability of cane during the season.
-
Partially forward integrated operations with presence of cogeneration unit :
The company has 9 MW cogeneration power plant which runs on the bagasse, a key by-product of cane crushing for captive consumption, while the company has a 10 year of power purchase agreement (PPA) with Uttar Pradesh power department at a tariff of Rs.4.78 per unit. The power plant is undergoing a capacity expansion which is expected to be completed by Sep,2021 , after which, the power production capacity will increase to 13MW. Total PPA has been signed with Uttar Pradesh Power Corporation Limited (UPPCL) for 7 M.W. (3MW+4MW) per hour. The company has assumed that they will generate power for 150 days @ 10.50 M.W. to 11.00 M.W. per hour in the upcoming season in 2021-22. Out of total power generation, the captive consumption is expected to be 5.5 M.W. per hour and balance 5.5 M.W. will be exported to UPPCL.
Credit Risks:
-
Weak financial profile of the company :
OOL’s financial profile is characterized by high gearing and weak debt coverage indicators. The gearing is high at 4.53 times as of March 31, 2020. The total debt of Rs 39.81 crs includes Rs. 30.34 crs term loan, Rs. 3.25 crs of working capital borrowings and Rs.6.22 crs of unsecured loans from promoters. Further, the coverage indicators remain weak with total Debt/EBITDA of 7.36 times and interest coverage of 0.95 times for FY20 owing to high debt levels and interest cost. However, with proposed revenues from the sale of power from FY22 onwards, the coverage indicators are estimated to improve from FY22. The inventory and payable days have, however, improved from 189 days and 243 days in FY20 to 153 days and 170 days, respectively, in FY21 (on a provisional basis).
-
Profitability of sugar mills remain vulnerable to industry cyclicality and agro-climatic risks :
Being an agri-commodity, the sugar cane crop is dependent upon climatic conditions and vulnerable to pests and diseases that may not only impact the yield per hectare but also the recovery rate. These factors can have a significant impact on the company’s profitability. In addition, the cyclicality in sugar production results in volatility in sugar prices. However, the sharp contraction in the sugar prices was curtailed after the introduction of MSP by the Central Government in June 2018. Over the long term, it is expected that higher ethanol production with increased diversion towards B-heavy molasses and direct sugar juice would help curtail the excess supply of sugar, resulting in lower volatility in sugar prices and in turn, cash flows from the sugar business.
-
Regulatory risks associated with the sugar industry :
The output in the sugar industry and variations in climatic conditions lead to significant volatility in sugar prices. However, with the government having fixed the input prices on cane procurement, the profitability is exposed to fluctuations in the sugar prices. This apart, the sugar industry is highly regulated with the government controlling other aspects of the business such as inventory holding levels, export restrictions, monthly sales etc.
For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale).
RATING SENSITIVITIES
Upward: A significant improvement in the operating performance position, leading to an improvement in the leverage (TOL/TNW) on a sustained basis will be positive for the ratings.
Downward: Further liquidity deterioration, or a further deterioration in the operating performance will be negative for the ratings. Any cost and time overrun in the capex will be negative for the ratings.
LIQUIDITY INDICATORS - Poor
In FY20, the company had generated an internal cash accrual of Rs. 2.85 Crs against which the company had a committed repayment obligation of Rs.10.79 crs, which was paid off by selling the huge inventory available with the company at that point of time. In FY21,the company was estimated to generate Rs. 5.33 Crs of internal cash accruals with a repayment obligation of Rs.10.69 crs. and to meet the shortfall to honour its debt repayment obligations, the company has infused the capital to the tune of Rs. 9.00crs in the form of redeemable preference shares in FY21 and will also be infusing additional Rs. 3.00 crs in FY22 in the form of unsecured loans from directors.
The average total fund based limit utilization for the last 12 months stood at around 30% of the sanctioned limit.
ABOUT THE ENTITYIncorporated in May 1984 as ANK Impex Private Limited, the company changed its constitution to a public limited company and was renamed to ANK Impex Limited in October 1984. On May 1992, the company was again renamed to Oswal Overseas Limited. It manufactures sugar in its plant in Bareilly (Uttar Pradesh) with an installed production capacity 3,500 TCD. OOL’s registered office is in New Delhi. The shares of the company were listed on the Bombay Stock Exchange (BSE) on September 1995.
KEY FINANCIAL INDICATORS (Standalone)| Key Parameters | Units |
FY 19-20 (Audited) |
FY 18-19 (Audited) |
|---|---|---|---|
| Operating Revenue | Rs.Crs. | 171.73 | 79.09 |
| EBITDA | Rs.Crs. | 5.41 | 2.55 |
| PAT | Rs.Crs. | 0.25 | 0.87 |
| Tangible Net Worth | Rs.Crs. | 8.78 | 8.60 |
| Total Debt/Tangible Net Worth | Times | 4.53 | 5.97 |
| Current Ratio | Times | 0.82 | 1.00 |
RATING HISTORY FOR LAST THREE YEARS (including withdrawal and suspended)
| Facilities | Current Rating (2021) | 2020 | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Type | Tenure | Amount (Rs.Crs.) |
Rating | Date | Rating | Date | Rating | Date | Rating |
| Fund Based | LT | 53.00 |
BWR B/Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
| Non Fund Based | ST | 2.00 |
BWR A4
(Assignment) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
| Grand Total | 55.00 | (Rupees Fifty Five Crores Only) | |||||||
BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.
| Analytical Contacts | |
|---|---|
|
Ankit Dixit Ratings Analyst Board : 91 11 23 413896 ankit.d@brickworkratings.com |
Tanu Sharma Director - Ratings tanusharma@brickworkratings.com |
| 1-860-425-2742 | media@brickworkratings.com | |
| SL.No. | Type Of Facilities | Long Term(Rs.Crs.) | Short Term(Rs.Crs.) | Total(Rs.Crs.) | ||
|---|---|---|---|---|---|---|
| 1 | Cash CreditSanctioned | 5.00 | _ | 5.00 | ||
| 2 | Term LoanSanctioned | 34.76 | _ | 34.76 | ||
| 3 | Bank GuaranteeProposed | _ | 2.00 | 2.00 | ||
| 4 | Term LoanProposed | 13.24 | _ | 13.24 | ||
| Total | 53.00 | 2.00 | 55.00 | |||
| TOTAL (Rupees Fifty Five Crores Only) | ||||||
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