Gem Sugars Limited

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 369.13 Crs. of Gem Sugars Limited

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (29 Jul 2020)	Present
Fund Based	179.20	264.00	Long Term	BWR BBB-/Stable Reaffirmation	BWR BBB - /Stable Reaffirmation
	96.00	96.00	Short Term	BWR A3 Reaffirmation	BWR A3 Reaffirmation
Non Fund Based	9.13	9.13	Short Term	BWR A3 Reaffirmation	BWR A3 Reaffirmation
Grand Total	284.33	369.13	(Rupees Three Hundred Sixty Nine Crores and Thirteen lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure

RATING ACTION / OUTLOOK

The rating reaffirmation of bank loan facilities of Gem Sugars Limited ('GSL' or 'the company') continues to draw strength from the experience of the promoters and management team, strong parentage of the Gem Group and Doddannavar Group of industries, stable operational performance in FY21 (Prov.), and established track record. The ratings are also supported by gradual diversification of the product profile and additional sources of revenue, integrated operations, proximity of the plant to sugarcane cultivation areas and established relationships with farmers for procurement of sugarcane. The ratings remain constrained by the moderate financial risk profile marked by high gearing and subdued debt service coverage ratio, working capital intensive operations with high dependence on external financing, agro-climatic risks, susceptibility to regulatory changes and cyclicality of the sugar industry. 

Brickwork Ratings (BWR) notes that Gem Sugars Limited had availed relief under the Covid-19 moratorium package for March-August 2020 for most of the facilities being rated. BWR also notes that the company has not applied for one time restructuring (OTR) of any loan under the RBI Resolution Framework for Covid-19 related Stress.

BWR believes that GSL's business risk profile will be maintained over the medium term. The rating outlook may be revised to ‘Positive’ if the company records substantial improvement in the operating performance and supply-demand dynamics are favourable with resultant higher sugar prices and profitability, improved working capital management, better debt coverage metrics and liquidity profile. The outlook may be revised to ‘Negative’ if the company reports any significant increase in the cane procurement cost impacting the sugar contribution margins resulting in lower than estimated coverage indicators or if higher than expected debt funded capital expenditure, deterioration in the performance of the company and a weaker liquidity position adversely impact the financial risk profile.

KEY RATING DRIVERS

Credit Strengths:

• Experienced management and established track record :

  The management of the company is well experienced, supported by qualified managerial and technical professionals. The promoters support the company operations with long term interest-free unsecured loans as and when needed. The company has a long operational track record of operations since 2003. It has been able to establish mutually beneficial relationships with local farmers and other entities of the supply chain.

• Strong parentage and locational advantage :

  The company is part of the Tamil Nadu based Gem Group and Karnataka based Doddannavar Group of industries. Both groups have established business interests in Tamil Nadu and Karnataka respectively. GSL has locational advantages ensuring steady availability of cane. The company’s 6500 TCD integrated sugar plant is located in Bilagi Taluk, Bagalkot District, Karnataka, which is a sugarcane belt of Karnataka. The company’s distillery and power co-generation plant are also located at the same place.

• Established integrated operations :

  The company has an integrated sugar plant with a capacity of 6500 TCD with 60 KPLD distillery and 24.50 MW power cogeneration plant. The integrated facility leads to diversification of revenue profile offsetting cyclicality in the sugar business. Sugar crushing capacity utilisation was ~96% and sugar recovery was 10.81% in FY21 (P) as against sugar capacity utilisation of ~83% and sugar recovery of 10.86% in FY20. 5.78 lakhs MT sugarcane was crushed in FY21 (P) as against 5.23 lakhs MT in FY18. 5.10 Crs. units of power was generated and 13793 KL of ethanol and Extra Neutral Alcohol (ENA) produced in FY21 (P). Sugar cane crushing days decreased to 93 days in FY21 (P) (97 days in FY20) despite higher amount of sugarcane crushed. Presently, the company sells power to ESCOMs consisting of HESCOM, BESCOM, GESCOM, MESCOM, CESC at Rs 4.76/unit. [P = Provisional]

• Diversification of revenue stream :

  The company is diversifying its source of revenue by increasing the production and sale of Extra Neutral Alcohol (ENA) and Denatured Anhydrous Ethanol from its distillery plant. The share of sugar sales in total revenue of the company came down from ~85% in FY18 to ~65% in FY21 (P).  The share of distillery products in total revenue increased from ~3% in FY18 to ~28% in FY21 (P).  The proportion of power sales in total revenue has been ~4-5% in the past three years. BWR notes the company's proposed capex to further enhance the distillery capacity before expanding the sugar production capacity. The diversification towards distillery units is expected to help the company offset the cyclical slump in the sugar industry. [P = Provisional]

Credit Risks:

• Moderate financial risk profile :

  Operating income marginally declined from Rs. 343.13 Crs. in FY19  to Rs. 329.81 Crs. in FY20. However, the EBIDTA and PAT remained stable at Rs. 39.78 crs and Rs.5.02 crs respectively. Leverage was high as reflected by debt/equity of 2.62 times and TOL/TNW of 4.54 times as on 31Mar2020. DSCR was subdued at 0.87 time and ISCR was moderate at 1.67 times as on 31Mar2020. As per the provisional financials of FY21, the company's operating income, EBITDA and PAT were at Rs. 292.20 Crs., Rs. 42.82 Crs. and Rs. 5.52 Crs., respectively.

• Project execution risk :

  The company had earlier proposed to expand its Ethanol cum Distillery Plant to 120 KLPD only at a cost of ~Rs. 85 Crs. which is being funded through term loan of ~Rs. 68 Crs. and balance from internal cash accruals. The project was expected to be commissioned by November 2021. However, due to the onset of Covid-19 pandemic, the company postponed the capex and also did not approach the lenders. Now, the company is in the process of approaching its lenders and the project is expected to be completed in December 2022. BWR also notes the company's plans to undertake capacity expansion of sugar plant to 10,000 TCD, co-generation plant to 52.5 MW and distillery plant to 120 KLPD at a cost of ~Rs. 328 Crs., expected to be funded through term loans (~Rs. 165 Crs.), promoter funding (Rs. ~85 Crs.), SDF loan (quasi equity) (~Rs. 62 Crs.) and internal accruals (~Rs. 15 Crs.). The said capex has been deferred and is likely to be considered only post completion of the Distillery expansion. The company is exposed to associated project execution risks; the debt levels are expected to increase from the current levels, which may lead to further moderation in credit metrics. BWR also takes note that the company is undertaking incremental investments in machinery upgrades to enhance its capacities for the Season 2021-22 . The said projects are to be funded primarily through internal accruals and interest-free unsecured loans from promoters.

• Working capital intensive nature of operations :

  Due to seasonality of the industry, the production takes place during 4-5 months a year while the product is sold over 10-12 months. This results in high working capital requirement and other carrying costs like godown maintenance, insurance etc. The company’s average fund based working capital utilization is in the range of 95-100% in the peak season. However, when the government imposes the buffer stock limits on sugar manufacturers, it provides them the buffer stock subsidy to support the carrying cost of the buffer stock.

• Susceptibility to regulatory changes and inherent volatility in sugar prices :

  The sugar industry is susceptible to movements in sugar prices which results in volatile profitability. While the input prices are driven by the government, sugar prices are volatile and based on open market prices which are dependent on the production levels. Besides, the government regulates domestic demand-supply through restrictions on imports and exports and buffer stock holdings. Regulatory mechanisms and dependence on monsoons have also rendered the sugar industry cyclical. Government interventions will remain a driver for the profitability of sugar mills and continue as a key rating sensitivity factor.

• Agro-climatic risks and cyclical trends in the industry :

  Sugar industry being agro based and vulnerable to commodity cycles is vulnerable to the associated risks. Sugar industry is a cyclical industry with one business cycle of ~3-5 years in which there is a supply glut followed by the slump in prices leading to contraction in production. Further, profitability of sugar mills shall remain vulnerable to the agro-climatic risks related to sugarcane production. The sugarcane crop is dependent upon weather conditions including timeliness and intensity of yearly monsoon, and is vulnerable to pests and diseases that may not only impact the yield per hectare but also the recovery rate. The time taken from harvesting to crushing of the sugarcane also affects the recovery rate of sugar. These factors can have a significant impact on the company’s profitability. The company is also exposed to geographical concentration risks associated with single-mill operations.

• Impact of Covid-19 pandemic :

  Covid-19 pandemic and the associated nation-wide lockdowns impacted the demand of sugar and distillery products in H1FY21. Recovery was fast in H2FY21 and the overall impact was not significant. GSL was also impacted in H1FY21 due to the pandemic and the lockdown but recovered soon after lifting of the lockdown. The second wave of Covid-19 pandemic has added uncertainty in the domestic sugar and ethanol market.

ANALYTICAL APPROACH - Standalone

BWR has applied its rating methodology as detailed at the end of the document. The company has a wholly owned subsidiary viz., Banashankari Sugars Pvt. Ltd which is not operational. Hence, BWR has adopted a standalone approach for arriving at its ratings.

RATING SENSITIVITIES

The ability of the company to optimally utilize its capacities, increase its scale of operations, improve operational efficiency and profitability, complete upcoming capex without any time and cost overrun, strengthen its overall credit profile and manage its working capital efficiently would be the key rating sensitivities

Positive:

• Higher than expected operational performance with improvement in capacity utilization and sugar recovery, on a sustained basis
• Specific credit metrics which may result in a rating upgrade include EBITDA margin above 14%, Total Debt/ TNW remaining below 1.50 times and DSCR >1.50 times on a sustained basis

Negative:

• A decline in the revenue and profitability leading to further deterioration in the overall credit metrics on a sustained basis
• Higher than expected debt funded capex, weakening the debt coverage metrics
• Specific credit metrics which may result in a rating downgrade include EBITDA <9%, Total Debt/TNW exceeding 3.50 times, DSCR and ISCR declining to below unity on a sustained basis
• Time and cost overruns in the proposed capex
• Impact of Covid-19 on next sugarcane crushing cycle starting in October 2021

LIQUIDITY INDICATORS - Stretched

The liquidity position of the company is stretched given by high debt servicing obligations, low net cash accruals and unencumbered cash & cash equivalents, stretched cash conversion cycle and high dependence on external working capital funding. EBITDA was sufficient to cover finance cost in FY21 (P). Net cash accruals for FY21 (P) were insufficient for debt repayments. However, the position is expected to improve in FY22 and FY23. Average fund based working capital utilization in past six months was ~95%. Cash & cash equivalents of Rs. 8.74 Crs. as on 31Mar2021 have only Rs. 0.84 Cr. as unencumbered portion. Cash conversion cycle continues to remain high at 248 days as on 31Mar2021 (P). Current ratio is adequate at 1.38 times as on 31Mar2021 (P). [P = Provisional]

ABOUT THE ENTITY

Gem Sugars Limited (GSL) was incorporated in 1995 at Bengaluru. However, commercial operations commenced from February 2003. The company is engaged in manufacturing and marketing of sugar, power generation and production of ethanol. The integrated plant is located in Kundargi village, Bilagi taluk, Bagalkot district, North Karnataka. It has an installed capacity of 6500 TCD, 60 KPLD distillery and 24.5 MW power cogeneration. 

Mr. R. Veeramani is the Chairman, Mr. R Sekar the Managing Director and Mr. Jawaharlal P Doddanavar the Whole time Director. The company is part of Gem Group of Tamil Nadu and Doddanavar Group of Kannataka.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 19-20 (Audited)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	329.81	343.13
EBITDA	Rs.Crs.	39.78	39.01
PAT	Rs.Crs.	5.02	4.68
Tangible Net Worth	Rs.Crs.	98.26	93.31
Total Debt/Tangible Net Worth	Times	2.62	3.04
Current Ratio	Times	1.33	1.33

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities.

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

Not applicable

RATING HISTORY FOR THE PREVIOUS 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	264.00	BWR BBB-/Stable (Reaffirmation)	27Mar2020	BWR BBB-Stable (Reaffirmation)	06Jun2019	BWR BBB-Stable (Reaffirmation)	07Mar2018	BWR BBB-Stable (Reaffirmation)
		NA	NA	29Jul2020	BWR BBB-Stable (Reaffirmation)	NA	NA	NA	NA
Fund Based	ST	96.00	BWR A3 (Reaffirmation)	27Mar2020	BWR A3 (Reaffirmation)	06Jun2019	BWR A3 (Reaffirmation)	07Mar2018	BWR A3 (Reaffirmation)
		NA	NA	29Jul2020	BWR A3 (Reaffirmation)	NA	NA	NA	NA
Non Fund Based	ST	9.13	BWR A3 (Reaffirmation)	27Mar2020	BWR A3 (Reaffirmation)	06Jun2019	BWR A3 (Reaffirmation)	07Mar2018	BWR A3 (Reaffirmation)
		NA	NA	29Jul2020	BWR A3 (Reaffirmation)	NA	NA	NA	NA
Grand Total		369.13	(Rupees Three Hundred Sixty Nine Crores and Thirteen lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

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.

Hyperlink/Reference to applicable Criteria

• General Criteria
• Approach to Financial Ratios
• Manufacturing Companies
• Short Term Debt

Analytical Contacts
Swarn Saurabh Senior Rating Analyst swarn.s@brickworkratings.com	Saakshi Kanwar Senior Manager Ratings saakshi.k@brickworkratings.com
1-860-425-2742 | media@brickworkratings.com

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Bank of India	Cash Credit - Sanctioned	12.50	_	12.50
2	Bank of India	Warehouse Receipts (WHR) - Sanctioned	_	40.00	40.00
3	Bank of India	Term Loan - Out-standing	19.22	_	19.22
4	Bank of India	Term Loan - Proposed	7.36	_	7.36
5	Bank of India	Common Covid Emergency Line of Credit (CCECL) - Out-standing	1.16	_	1.16
6	Bank of India	GECL - Sanctioned	3.00	_	3.00
7	Bank of India	Letter of Credit - Sanctioned	_	1.00	1.00
8	Bank of India	Bank Guarantee - Sanctioned	_	0.25	0.25
9	Indian Bank	Cash Credit - Sanctioned	8.00	_	8.00
10	Indian Bank	Term Loan - Out-standing	1.33	_	1.33
11	Indian Bank	Term Loan - Proposed	4.72	_	4.72
12	Indian Bank	Common Covid Emergency Line of Credit (CCECL) - Out-standing	0.72	_	0.72
13	Indian Bank	GECL - Sanctioned	1.93	_	1.93
14	Indian Overseas Bank	Cash Credit - Sanctioned	27.64	_	27.64
15	Indian Overseas Bank	Term Loan - Out-standing	4.05	_	4.05
16	Indian Overseas Bank	Term Loan - Proposed	16.28	_	16.28
17	Indian Overseas Bank	Common Covid Emergency Line of Credit (CCECL) - Proposed	_	_	0.00
18	Indian Overseas Bank	GECL - Proposed	6.67	_	6.67
19	Indian Overseas Bank	Letter of Credit - Sanctioned	_	2.00	2.00
20	Indian Overseas Bank	Bank Guarantee - Sanctioned	_	2.00	2.00
21	Indian Overseas Bank	Common Covid Emergency Line of Credit (CCECL) - Out-standing	2.78	_	2.78
22	Punjab National Bank	Common Covid Emergency Line of Credit (CCECL) - Out-standing	1.04	_	1.04
23	Punjab National Bank	Cash Credit - Sanctioned	12.50	_	12.50
24	Punjab National Bank	Term Loan - Out-standing	_	_	0.00
25	Punjab National Bank	Term Loan - Proposed	7.36	_	7.36
26	Punjab National Bank	Common Covid Emergency Line of Credit (CCECL) - Proposed	_	_	0.00
27	Punjab National Bank	GECL - Sanctioned	2.82	_	2.82
28	State Bank Of India (SBI)	Cash Credit - Sanctioned	41.00	_	41.00
29	State Bank Of India (SBI)	Warehouse Receipts (WHR) - Sanctioned	_	56.00	56.00
30	State Bank Of India (SBI)	Term Loan - Out-standing	8.10	_	8.10
31	State Bank Of India (SBI)	Term Loan - Proposed	24.15	_	24.15
32	State Bank Of India (SBI)	Common Covid Emergency Line of Credit (CCECL) - Out-standing	3.20	_	3.20
33	State Bank Of India (SBI)	GECL - Sanctioned	9.95	_	9.95
34	State Bank Of India (SBI)	Letter of Credit - Sanctioned	_	2.00	2.00
35	State Bank Of India (SBI)	Bank Guarantee - Sanctioned	_	1.00	1.00
36	The Karnataka State Co-operative Apex Bank Limited	Cash Credit - Sanctioned	5.00	_	5.00
37	The Karnataka State Co-operative Apex Bank Limited	Common Covid Emergency Line of Credit (CCECL) - Proposed	_	_	0.00
38	The Karnataka State Co-operative Apex Bank Limited	GECL - Sanctioned	1.00	_	1.00
39	The Karnataka State Co-operative Apex Bank Limited	Term Loan - Proposed	2.95	_	2.95
40	The Karnataka State Co-operative Apex Bank Limited	Common Covid Emergency Line of Credit (CCECL) - Out-standing	0.50	_	0.50
41	The Sugar Development Fund	Term Loan - Out-standing	8.40	_	8.40
42	UCO Bank	Cash Credit - Sanctioned	9.00	_	9.00
43	UCO Bank	Term Loan - Out-standing	1.41	_	1.41
44	UCO Bank	Term Loan - Proposed	5.30	_	5.30
45	UCO Bank	Common Covid Emergency Line of Credit (CCECL) - Proposed	_	_	0.00
46	UCO Bank	GECL - Sanctioned	2.16	_	2.16
47	UCO Bank	Bank Guarantee - Sanctioned	_	0.88	0.88
48	UCO Bank	Common Covid Emergency Line of Credit (CCECL) - Out-standing	0.80	_	0.80
Total			264.00	105.13	369.13
TOTAL (Rupees Three Hundred Sixty Nine Crores and Thirteen lakhs Only)