RATING RATIONALE
23Dec2022
Udagiri Sugar & Power Ltd.
Brickwork Ratings upgrades the ratings at BWR BBB/Stable for the Bank Loan Facilities of Rs.175.00 Crs. of Udagiri Sugar & Power Ltd.
Particulars| Facilities** | Amount (Rs.Crs.) | Tenure | Rating# | ||
|---|---|---|---|---|---|
| Previous | Present | Previous (10 Aug 2021) |
Present | ||
| Fund Based | 128.00 | 175.00 | Long Term |
BWR BBB- /Stable
Assignment |
BWR BBB
/Stable Upgrade |
| Grand Total | 128.00 | 175.00 | (Rupees One Hundred Seventy Five Crores Only) | ||
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
Note: This rating pertains to an existing assignment received prior to 6 October 2022.
RATING ACTION / OUTLOOK
Brickwork Ratings upgrades the Bank Loan Rating of Udagiri Sugar & Power Ltd. to BWR BBB/Stable on account of sustained improvement in profitability, debt coverage indicators, and the continued support from the Government in the form of remunerative pricing for ethanol. The rating further reflects the robust business profile of the Company marked by sugar cane crushing capabilities of 3500 TCD and diversified revenue streams supported by integrated operations including power sales and income from the distillery units. The Company further benefits from assured sugar cane availability from its command area backed by a satisfactory track record of cane payments.
The rating draws comfort from the established track record of operations of the Company supported by the qualified and experienced management in the sugar industry and the favorable location of the plant. The Company also benefits from the integrated nature of operations and also funding support from promoters in the form of unsecured loans.
However, the rating is constrained on account of the working capital-intensive nature of operations, average financial risk profile, project implementation risk due to the planned capex, exposure to the cyclical nature of the sugar industry, agro-climatic conditions, and government regulation.
KEY RATING DRIVERSCredit Strengths:
-
Integrated operations with the presence of a cogeneration unit :
The company has a presence of over a decade in the sugar industry which has enabled the promoters to establish strong relationships with cane producers and with customers. USPL has a 14 MW cogeneration power plant that runs on the bagasse, a key by-product of cane crushing. The excess power is sold to Maharashtra State Electricity Board (MSEB) at 6.64 per unit. The PPA with the MSEB is valid till FY26. The company has a 55-kilo liter per day (KLPD) distillery capacity and uses B-heavy and C-heavy molasses as raw materials. The company supplied 42 lakh liters of ethanol to oil marketing companies (OMCs) during FY22A. The revenue from power and distillery sales supported the company’s profitability levels despite the volatility in sugar prices during FY22 and the trend is likely to continue going forward.
-
Government’s consistent support of the Sugar Industry :
The Government of India, in order to support the sugar industry has adopted multiple measures over the past couple of years, such as fixation of a minimum support price (MSP) of sugar, extending working capital loans with interest subvention under scheme SEFASU-2014, extending financial assistance through soft loan scheme, export subsidy to motivate sugar export which was otherwise unviable and creation of sugar buffer stock to improve the demand-supply situation in the domestic market, etc.
-
Location Advantage :
The company enjoys the strategic location advantage as the sugar factory is located in Sangli, Maharashtra which has witnessed high cane yield & high sugar recovery rate on a y-o-y basis. The recovery rate for the company ranged between 11.8% to 12.4% over the past 3 years.
-
Comfortable financial risk profile, supported by improved capital structure and debt coverage indicators :
The operating revenues of USPL increased y-o-y by ~76% in FY22 to Rs.417.79 Crs. with a CAGR of 21% over the last 4 years. The profit margins have remained healthy and consistent on a y-o-y basis. The company registered an operating profit margin of 9.08% in FY22 (FY21: 14.91%) and an improved net profit margin of 6.19% in FY22 (FY21: 5.50%). Moreover, in the first 8MFY23, the company registered a sale of Rs.194 Crs. which is around 58% of FY23 projected revenue. In view of the upcoming sugar season on the back of the government's decision to allocate a quota of 60 LMT of sugar for export for sugar season 2022-23, with effect from November 1, 2022, the projections of the company look achievable.
The net cash accruals for the company increased to Rs.29.01 Crs. in FY22 from Rs.18.23 Crs. in FY21. The overall gearing of USPL, as indicated by Total Debt/TNW and TOL/TNW has improved significantly at 1.23 times as in FY22 (FY21: 3.58 times) and 2.40 times as in FY22 (FY21: 5.19 times) respectively. -
Favorable policy to address the structural issues faced by the sugar industry :
The Advancement of Ethanol Blended Petrol-EBP20 announced in June 2021 along with favorable policies such as remunerative pricing of ethanol, easing of regulations to enable interstate movements as well as relatively relaxed procurement procedures by OMCs will help the industry to address structural issues such as overproduction, higher inventory holding periods and export dependency.
-
Regulatory risks and volatility in sugarcane yield and prices :
The government regulates the sugar industry by fixing the raw material prices in the form of State Advised Prices and Fair & Remunerative Prices. The government also regulates domestic demand and supply through restrictions on imports and exports. Additionally, price fluctuations of Sugar products expose the Company to volatility in revenue.
-
Working capital-intensive nature of operations :
USPL's leverage is 1.23x and the current ratio is 1.00x during FY22. As inherent with the companies in the sugar sector, USPL's working capital intensity remains high due to the lengthy inventory holding period. The high levels are on account of government regulations related to the minimum selling price and monthly release quota. The company uses short-term banking facilities to fund these holdings resulting in higher debt levels. Diversion of sugar juice and B Heavy molasses towards the production of ethanol, refined spirits, and extra neutral Alcohol will help the integrated sugar mills to reduce their inventory holding period thus easing the debt requirement.
-
Susceptibility of profitability to volatility in raw material prices :
The raw material (sugarcane) and the final product (sugar) are sensitive to fluctuations in commodity prices and thereby impacting the profitabilityas witnessed in reduced EBITDA margins in FY22. While the price of sugarcane is dependent on the monsoons, the price of sugar is inherently dependent on the production of sugarcane and the quantity of sugar in the open market. However, this risk is mitigated to some extent as the price of sugar is supported by MSP.
-
Agro-climatic risks arising out of key raw material being an agricultural product :
The raw material i.e. sugarcane is an agricultural crop with high water requirements and is dependent on monsoons. Any changes in monsoons adversely affect the growth of the crop and hence in turn affect the Company’s revenues. This is mitigated to a certain extent by the availability of an irrigation facility in the Sangli area of Maharashtra where the plant is located.
For arriving at its ratings, BWR has considered the standalone performance of USPL. BWR has applied its rating methodology as detailed in the Rating Criteria (hyperlinks provided at the end of this rationale).
BWR has essentially relied on the company’s audited financial results of FY22, key YTD financials for FY23, projections for FY24 and clarification/information provided by the company. BWR has applied its rating methodology as detailed in the Rating Criteria.
RATING SENSITIVITIES
Upward Factors:
- Sustained and substantial improvement in operating income and profitability resulting in the improvement of the financial risk profile and liquidity profile of the company
Downward Factors:
- A material reduction in profitability margin, deterioration in liquidity, and delay in repayment of loans may lead to negative rating action.
- Any delay in finalizing funding for the capital expenditure project and completion of the project results in leverage capital structure and weak debt coverage indicators.
The company has a repayment obligation of ~Rs.8.58 Crs. for FY23 and ~Rs.5.28 Crs. in FY24. However, the company’s net accruals are expected to remain sufficient (in the range of ~Rs.40 Crs. to Rs.45 Crs.) to service the principal debt repayment obligations. The average fund-based working capital utilisation remained moderate at around 40% across all the banks for the 9 months ending Sep-2022. As of 30-Nov-2022, the company had cash in hand of Rs.7.68 Crs, and a balance in the current account of Rs.2.44 Crs.
ABOUT THE ENTITYEstablished in 2010, Udagiri Sugar & Power Ltd. promoted by Mr.Shivajirao Kadam, Mr. Mohanrao Kadam, and Mr. Rahul Kadam, is a closely held company with 100% shareholding of the Kadam family. The company has set up 3500 tonnes of cane per day sugar plant. The company has also undertaken various activities for the upliftment of the farmers in the region by providing the latest and upgraded techniques of farming leading to increased production of sugar cane in the region. The company also undertakes periodical camps and programs for farmers to guide and educate them in increasing the recovery and yield of sugarcane.
The company has also established a 14 MW co-generation unit, and 55 KLPD molasses-based distilleries unit. The manufacturing facility is located in the village of Bamani Pare, district Sangli (Maharashtra). Being fully integrated the company enjoys a diversified set of revenues from all 3 businesses.
Note: Unaudited FY23 Operating Revenue is up to Nov'23.
KEY FINANCIAL INDICATORS (Standalone)| Key Parameters | Units |
FY 21-22 (Audited) |
FY 20-21 (Audited) |
FY 22-23 (Unaudited) |
|---|---|---|---|---|
| Operating Revenue | Rs.Crs. | 417.79 | 236.53 | 194.00 |
| EBITDA | Rs.Crs. | 37.93 | 35.27 | Not Available |
| PAT | Rs.Crs. | 25.87 | 13.01 | Not Available |
| Tangible Net Worth | Rs.Crs. | 98.58 | 69.63 | Not Available |
| Total Debt/TNW | Times | 1.23 | 3.58 | Not Available |
| Current Ratio | Times | 1.00 | 0.88 | Not Available |
The terms of sanction include standard covenants normally stipulated for such facilities.
STATUS OF NON-COOPERATION WITH PREVIOUS CRA
NA
ANY OTHER INFORMATIONNA
RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)| Facilities | Current Rating (2022) | 2021 | 2020 | 2019 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Type | Tenure | Amount (Rs.Crs.) |
Rating | Date | Rating | Date | Rating | Date | Rating |
| Fund Based | LT | 175.00 |
BWR BBB/Stable
(Upgrade) |
10Aug2021 |
BWR BBB- Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
| Grand Total | 175.00 | (Rupees One Hundred Seventy Five Crores Only) | |||||||
Press Release, as on 19Sep2022
The rating advisory had been issued as the company had shared the majority of the information required for the review of the ratings. However, some essential information was still underway, and the analytical team was looking for additional time to review the rating.
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| Analytical Contacts | |
|---|---|
|
Gaurav Agnihotri Senior Rating Analyst gaurav.a@brickworkratings.com |
Chintan Dilip Lakhani Director- Ratings chintan.l@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 | IDBI Bank | Open Cash Credit / Cash Credit (Hypothecation/Pledge)Proposed | _ | _ | 0.00 | |
| 2 | State Bank Of India (SBI) | Harvesting and TransportationSanctioned | 25.00 | _ | 25.00 | |
| 3 | State Bank Of India (SBI) | Open Cash Credit / Cash Credit (Hypothecation/Pledge)Proposed | 90.00 | _ | 90.00 | |
| 4 | State Bank Of India (SBI) | Open Cash Credit / Cash Credit (Hypothecation/Pledge)Sanctioned | 60.00 | _ | 60.00 | |
| Total | 175.00 | 0.00 | 175.00 | |||
| TOTAL (Rupees One Hundred Seventy Five Crores Only) | ||||||
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