December 16, 2020

Shree Datta Shetkari Sahakari Sakhar Karkhana Limited, : Rating downgraded to [ICRA]BB+ (stable)

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Fund-based - Working Capital [ICRA]BB+(stable) downgraded from 75.00 75.00 Facilities [ICRA]BBB- (negative) [ICRA]BB+(stable) downgraded from Fund-based – Term Loan 25.00 25.00 [ICRA]BBB- (negative) Total 100.00 100.00 *Instrument details are provided in Annexure-1

Rationale The rating downgrade reflects the weakening of the financial risk profile of Shree Datta Shetkari Sahakari Sakhar Karkhana Limited, Shirol (or Datta Sugar) characterised by a stretch in its capital structure emanating from its higher dependence on external debt and consequent weakening of coverage indicators in the past fiscal. Further, pandemic induced disruptions in the business environment, along with unprecedented delays in extension of subsidies to sugar mills, is likely to keep pressure on the revenues and profitability of Datta Sugar in the current fiscal. The ratings also remain constrained by the vulnerability of its profitability to sugar realisation as well as cane procurement cost movement, which are impacted by external factors like agro-climatic conditions and regulations with respect to cane pricing and exports. The rating also factors in the working capital intensive nature of business and the intense competitive intensity in the catchment area, given the presence of several sugar manufacturing companies in the vicinity.

Further, ICRA understands that the company had applied for restructuring of its debt obligations under the Reserve Bank of ’s (RBI’s) resolution framework for Covid-19 related stress announced on August 6, 2020. The application for restructuring was made prior to the due date of debt servicing which was scheduled after the end of the moratorium period on August 30, 2020. However, in the recent development as confirmed by the lenders/company, the company has now opted out of its earlier envisaged debt restructuring program. Further, it has been informed to ICRA that the company has repaid its dues for the months of September to December for one of its lenders which is in line with the initial repayment schedule while the repayments for the months of April 2020 to August 2020 (the moratorium period) are going to be made in accordance with the extended/ revised loan schedule. For another lender, the company has squared-off its annual debt obligations partly through cash and partly through pledge limits (working capital limits). The future repayments for the said loan account will be as per its initial repayment schedule. This apart, the company is expected to receive a fresh line of credit to the tune of Rs. 35.20 crore under the recent bank policy/guideline, which is expected to ease some liquidity pressures for the company.

The rating continues to draw comfort from the long operational history of the company in the sugar business and its favourable geographical location in , , known for its high cane yield and high sugar recovery rate. Further, the company’s operations remain fully integrated with its subsidiary, Urjankur Shree Datta Power Company Limited (USDPCL), which provides power and steam to the sugar entity. Further, forward integration into the distillery 1

business provides an alternative revenue stream to the company, thereby minimising the impact of the cyclicality of the sugar business to an extent. The rating also continues to factor in favourable Government policies towards the sugar industry in the form of soft loans and interest subvention schemes, among others. Key rating drivers and their description

Credit strengths

Long operational track record – Datta Sugar has a long operational track record of close to five decades. Commencing operations in the sugar season of October 1970 as a standalone sugar entity, down the years the company has also added a distillery unit. Datta Sugar, given its long presence at Shirol, in the Kolhapur region of Maharashtra, has developed healthy relationships with farmers from nearby villages. The company had close to 32,700 cane supplying members spread across of , Maharashtra, and the adjoining Belgaum district of Karnataka.

Location advantage from presence in high cane yield, high sugar recovery Kolhapur district of Maharashtra – Datta Sugar is located in Maharashtra’s Kolhapur district, which has a higher sugar recovery rate (more than 12%) compared to the state average of 11%, given the conducive topography and favourable environment conditions. Datta Sugar recorded a sugar recovery rate of 12.10% in SY12020 over 12.49% in SY2019 mainly on low quality cane available subsequent to crop damage due to flash floods in September 2019. Its capacity utilisations have historically remained close to 100%. In SY2020, the company has crushed close to 1.05 million metric tonne over 1.20 million metric tonne of cane in SY2019.

Forward integration into distillery provides cushion against cyclicality in sugar business - The company’s sugar operations are fully integrated with 60 Kilo Litres Per Day (KLPD) of distillery operations, which provides some comfort vis-à-vis cyclical sugar operations. In FY2020, the company derived Rs. 472.12 crore (81%) of revenues from its sugar operations, while Rs. 82.00 crore was derived from its distillery operations. In FY2019, Rs. 409.24 crore (83%) of revenues were derived from its sugar operations, while Rs. 81.00 crore (16%) came from its distillery operations. USDPCL supplies steam and power free of cost to Datta Sugar.

Government support to the sugar industry – The company benefits from Government support to the sugar industry in the form of low-cost soft loans and interest subvention schemes, among others, which materially impact the profitability of the domestic sugar industry. The company is likely to continue to benefit from the sugar export subsidy from the Government of India as in the past fiscal. In FY2020, the company has booked Rs. 30.00 crore as sugar export subsidy.

Credit challenges

Stretch in capital structure due to higher dependence on external borrowing and consequent weakening of coverage indicators – The company’s debt profile remains dominated by working capital loans and term borrowings. Datta Sugar’s capital structure remains stretched mainly due to its high reliance on the external borrowings, chiefly working capital borrowings, which along with low profitability has maintained the pressure on the coverage indicators in FY2020 in line with the past. The gearing remained at 3.75 times as on March 31,2020 over 3.39 times as on March 31, 2019, mainly because of increase in working capital and soft loans. Total Debt/OPBIDTA remained at 14.04 times in FY2020 against

1 Sugar Season: October to November

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19.10 times in FY2019. NCA/TD remained at 1% in FY2020 compared to 2% in FY2019. Interest coverage remained at 1.14 times in FY2020 compared to 1.59 times in FY2019. Improvement in credit metrics, thus remains a key rating sensitivity.

Likely pressure on revenue and profitability in the current fiscal owing to pandemic induced disruption and unprecedented delays in receipt of export subsidies to sugar mills – Timely receipt of sugar export subsidy, demand movement of the company manufactured products – sugar and distillery products in the second half of the fiscal remain crucial as far as the revenues and the profitability of the company is concerned especially in the backdrop of the Covid - 19 pandemic though sugar sales in H1FY2021 have been almost in line with H1FY2020. The domestic market is likely to witness an excess supply of sugar due to bumper sugar production in the current crushing season which may further add pressure to sugar realisations levels in H2FY2021.

Fluctuating revenues in the past, limited operating profitability - Sugar revenues have dominated the revenue profile of the company (close to 81% of total revenues in FY2020) followed by distillery revenues (close to 15%). Sugar revenues have demonstrated a fluctuating trend in past fiscals, registering a growth in the past fiscal after decreasing in FY2019. Typically, the profitability of sugar entities remains driven by sugar realisations and cane procurement costs. While sugar realisations remain market driven, the state governments fix the minimum support price for cane. Any adverse movements in the same impacts the contribution margins and, hence, profitability of the sugar mills. The operating margins have remained constrained in the past fiscals mainly on high cane procurement costs, although they have improved in FY2020 over the previous fiscal mainly owing to increased sugar volume sales. In the current year overall sugar sales are likely to moderate as compared to FY2020. Operating margins remained at 6.11% in FY2020 over 4.01% in FY2019. High interest and finance charges have led to constrained net profit margins in the past, the same remained at 0.07% in FY2020 compared to 0.45% in FY2019. Given the impact of the ongoing pandemic, the recovery of demand for sugar and distillery products, especially industrial demand, remains a key monitorable. Focus on distillery product sales will remain critical to maintain the operating profitability in the current fiscal.

High working capital intensity; strained liquidity profile evident from full utilisation of drawing power in working capital limits - Typical for a sugar mill, the year-end working capital intensity remained on the higher side at 73% as on March 31, 2020, mainly on sugar inventory build-up. For the November 2019 to October 2020 period, the company has almost fully utilised its limits as far as its drawing power is concerned, evidencing the strain on its liquidity position.

Exposure to agro-climatic risks and cyclical trends in sugar business - Cane production remains a function of agro- climatic conditions, which ultimately impacts the volumes and realisations of sugar and its by-products. Cane crushing remained marginally impacted in SY2020 over SY2019, mainly because of the floods in the catchment area in September 2019. Moreover, the sugar business remains vulnerable to any unfavourable changes in Government policies related to the sugar trade.

Liquidity position: Stretched Datta Sugar’s liquidity remains stretched as evidenced by its negative cash flow from operations as on March 31, 2020. Further, cash balance remained modest at Rs. 0.34 crore as on March 31, 2020. The company is expected to receive a sanction of an emergency line of credit to the tune of Rs.35.20 crore with one-year moratorium in the current fiscal which is likely to provide some cushion to its strained liquidity position. However, the impending sizable repayments from the existing soft loans is likely to keep the liquidity profile under stress in the near term. The working capital utilisation as a percentage of drawing power remained almost fully utilised for the November 2019 to October 2020 period.

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Rating sensitivities Positive triggers - The ratings may see an upward movement if the company demonstrates notable improvement in profit metrics leading to better coverage indicators on a sustained basis along with better working capital management ultimately aiding improvement in liquidity. Negative triggers - Negative pressure on the rating could arise if there is any delay in timely liquidation of inventory, accrual of fiscal benefits impacting profitability, increase in working capital intensity and working capital levels leading to stretched coverage indicators.

Analytical approach

Analytical Approach Comments Applicable Rating Methodologies Rating Methodology for Entities in the Sugar Industry Parent/Group Support Not applicable Consolidation/Standalone Standalone

About the company Incorporated in 1969, Shree Datta Shetkari Sahakari Sakhar Karkhana Limited manufactures sugar and distillery products. The 7,000-TCD sugarcane and 60-KLPD distillery facility is located at Shirol in Kolhapur district of Maharashtra. In FY2018, Datta Sugar acquired ~67% stake in Urjankur Shree Datta Power Company Limited for Rs. 88.00 crore from IL&FS Renewable Energy Limited.

In FY2020, the company reported a net profit of Rs. 0.34 crore on an OI of Rs. 480.21 crore against a net profit of Rs. 2.20 crore on an OI of Rs. 485.22 crore in the previous year.

Key financial indicators FY2019 FY2020 Rs. crore (Audited) (Audited) Operating Income (Rs. crore) 485.22 480.21 PAT (Rs. crore) 2.20 0.34 OPBDIT/OI (%) 4.01% 6.11% RoCE (%) 3.40% 5.35%

Total Outside Liabilities/Tangible Net Worth (times) 4.93 4.96 Total Debt/OPBDIT (times) 19.10 14.04 Interest Coverage (times) 1.59 1.14 DSCR 0.57 0.79

Status of non-cooperation with previous CRA: CRISIL, vide its release dated September 22, 2020, has revised the rating to CRISIL B/Stable Issuer not cooperating from CRISIL BB+/Stable Issuer Not Cooperating. Any other information: None

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Rating history for past three years Current Rating (FY2021) Rating History for the Past 3 Years Rating FY2020 FY2019 FY2018 Instrument Amount Amount Type 16-Dec- 07-Jan- 10-Jan 27-Dec Rated Outstanding - 2020 2020 2019 2018 Long [ICRA]BB+ [ICRA]BBB- [ICRA]BBB- [ICRA]BBB- 1 Term Loans 25.00 6.57# - Term (stable) (Negative) (Stable) (Stable) Long [ICRA]BB+ [ICRA]BBB- [ICRA]BBB- [ICRA]BBB- 2 Cash Credit 75.00 0.00 - Term (stable) (Negative) (Stable) (Stable) Total 100.00 Amount in Rs. crore; # As on March 31,2020

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details ISIN No Instrument Date of Issuance/ Coupon Maturity Date Amount Rated Current Rating and Name Sanction Rate (Rs. crore) Outlook

- Term Loans August 2015 7% August 2021 25.00 [ICRA]BB+ (stable) - Cash Credit NA NA NA 75.00 [ICRA]BB+ (stable) Source: Shree Datta Shetkari Sahakari Sakhar Karkhana Limited, Shirol

Annexure-2: List of entities considered for consolidated analysis – Not applicable

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Analyst Contacts K. Ravichandran Suprio Banerjee +91 44 4596 4301 +91 22 6114 3443 [email protected] [email protected]

Srinivas Menon Shashikant Raut +91 22 6169 3354 +91 20 66969915 [email protected] [email protected]

Relationship Contact Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

About ICRA Limited:

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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

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