Shiraguppi Sugar Works Limited 04 Oct 2019

Rating Rationale Shiraguppi Sugar Works Limited 04 Oct 2019 Brickwork Ratings reaffirms the rating for the Bank Loan Facilities of Rs. 167.09 crs of Shiraguppi Sugar Works Limited (hereafter referred to as SSWL or the company). Particulars Amount Rating* (Rs. Cr) Facility Tenure Previou Previous^ Present# Present s (08 June 2018) Fund Based Term Loan 8.15 137.09 Long Cash Credit 30.00 30.00 BWR B-/Stable BWR B-/Stable Term Proposed Cash Credit 37.00 - (Rupees One Hundred Sixty Seven Crores and Nine Total 75.15 167.09 Lakhs Only) *Please refer to BWR website www.brickworkratings.com/ for definition of the ratings ; # Details of the bank loan facilities are available in Annexure I;^Rating was moved to Rating Not Reviewed Category on 09 Sep 2019 Rating Action/Outlook : The reaffirmation of rating for the bank loan facilities continues to factor the experience of the promoters in sugar industry, support derived from the Karnataka based Doddannavar group, proximity of the plants to sugarcane cultivation areas and established relationships with farmers for procurement of sugar. The ratings, however, remain constrained by the modest scale of operations, below average credit risk profile marked by strained liquidity, high gearing and subdued debt protection metrics, exposure to agro climatic risks including monsoon deficit conditions, cyclicality of the sugar industry which exposes the company to volatility in revenue and profitability, large working capital requirements and susceptibility to regulatory changes affecting the industry. www.brickworkratings.com Page 1 of 7 The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. BWR expects that Shiraguppi Sugar Works Limited’s business risk profile will be maintained over the medium term. The outlook may be revised to Positive if the company records 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 or in case of any significant increase in leverage levels of the company and/or there is deterioration in the performance of the company, resulting in lower than estimated coverage indicators and a weaker liquidity position. Key rating drivers Credit Strengths ■ Experienced management and established track record :The management of the Company is well experienced and the company has completed its fifth crushing season. This operational track record of operations is expected to continue to drive SSWL’s business growth over the medium term. ■ Strong parentage and Locational advantages : Shiraguppi Sugar Works Limited is a part of the Karnataka based Doddannavar group. The Group is into various businesses like Mining, Logistics, Granite, Sugar & renewable energy. The company has locational advantages ensuring steady availability of Cane. The Company’s plant is located in Belagavi district Karnataka, which is a sugarcane belt of Karnataka. ■ Integrated operations : The Company has a semi integrated sugar plant with a capacity of 5000 TCD and 20 MW cogeneration plant. The semi integrated facility leads to diversification of revenue profile offsetting cyclicality in the sugar business. Capacity utilisation was 78% and sugar recovery was 11.23% in FY19 as against capacity utilisation of 65% and sugar recovery of 11.51% in FY18. 4.46 Lakhs MT sugarcane were crushed and 4.70 crs units of power generated in FY19. Sugar cane crushing days decreased to 115 days in FY 19 (135 days in FY19), however average crushing per day has increased to ~3953 MT in FY19 from ~3272 MT in FY18. Credit Weakness: ■ Below average financial risk profile- Operating income decreased to Rs.164.21 crs in FY18 as against Rs. 209.41 crs in FY17, due to Central Government restrictions on sale of Sugar in Feb and March 2018 (considered to be the peak season in the industry) in the form of stockholding measures to control falling prices. Further, on a provisional basis, the Company’s revenue has come down to Rs. 151.74 crs in FY19, due to low sugar prices. Debt protection metrics were subdued reflected in DSCR of 1.17 times and ISCR of 1.42 times as on March 31 2018. The company’s leverage levels are high as the Company has availed new term loans of Rs. 150 crs during FY19 and Tangible Net Worth has declined due to write off of expenditure on account of cane development expenses over the next 5 years at 20% each year (commencing from FY19), This has led to high gearing as www.brickworkratings.com Page 2 of 7 reflected in debt/equity of 5.04 times (Analysed Debt/Equity - 1.67 times, after considering unsecured loans as quasi equity) as on 31 Mar 2019 (provisional) as against 1.53 times (Analysed Debt/Equity was 0.45 times) as on 31 Mar 2018. ■ Working capital intensive nature of operations : As is inherent in the sugar industry, SSWL’s operations are working capital intensive as the Company has to procure 4-6 months of sugarcane for production. Additionally, the company immediately crushes the sugarcane (for maximum recovery of sugar) and holds sugar inventory, which again leads to larger working capital requirements.Average FBWC utilization is in the range of 95-100% in peak season. ■ 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 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: Profitability of sugar mills will remain vulnerable to the agro-climatic risks related to cane production. Being an agricultural product, the sugar cane crop is dependent upon weather conditions and is 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. The company is also exposed to geographical-concentration risks associated with single-mill operations . Analytical approach - Standalone While assigning the ratings, BWR has applied its rating methodology as detailed in the Rating Criteria (hyperlinks provided at the end of this rationale). The Company does not have any subsidiaries. Rating Sensitivities The ability of the company to optimally utilize its capacities, increase its scale of operations, improve operational efficiency and profitability, strengthen its overall credit profile and ensure timely debt servicing would be the key rating sensitivities. Positive: ● Substantial improvement in the revenue, EBIDTA margin and credit metrics on a sustained basis will be positive for the ratings. ● Specific credit metrics that could lead to an upgrade of SSWL’s rating include (1) Total Debt/TNW below 2 times on a sustained basis (2) DSCR greater than 1.50 times on a sustained basis. Negative : ● A decline in the revenue and profitability leading to deterioration in the overall credit metrics on a sustained basis will be negative for the ratings. www.brickworkratings.com Page 3 of 7 ● Decline in profitability - Operating margin below 10% and net margin below 3%, due to lower price realisations, increase in input costs or a rise in capex ● Weakening in debt protection metrics with DSCR and ISCR declining below 1 time Liquidity - Stretched : The Company’s liquidity position is stretched as seen in the working capital utilization of 100% due to the nature of business operations. Current ratio is weak at < 0.50 times for the last 3 years. Cash and cash equivalents were around Rs 1.23 Crs as on March 31, 2019. Debt obligations are around Rs. 21.42 crs each for FY20 & FY21 and cash accruals are - Rs.6.20 crs for FY19 with projected cash accruals of Rs.9.84 crs for FY20. In view of insufficient cash accruals for repayment of debt obligations, the promoters have brought in unsecured loans, which were ~ Rs. 60.82 crs as on 31 Mar 2019. Any deficit in cash accruals to service debt would be covered by additional unsecured loan from the promoters. About the Company Shiraguppi Sugar Works Limited was incorporated in 1995 with its registered office at Belagavi, Karnataka. SSWL is a part of Karnataka based Doddannavar Group and is engaged in manufacturing of sugar. The manufacturing facility is located at Kagwad, Tal. Athani, dist Belagavi. The installed capacity of the plant is 5000 tonnes per Day (TCD) and there is a 20 MW cogeneration unit. The Company produces various grades of sugar namely S1, S2, M and Brown. Capacity utilization was ~78% in FY19(~65% in FY18) and sugar recovery was 11.23% in FY19(11.51% in FY18). The Company also sells by-products like Bagasse, Molasses and Press Mud. Mr. Kallappa P Magennavar is the Chairman and Dr. Ramesh P Doddanavar is the Managing Director. Financial Performance 31 Mar 2017 31 Mar 2018 Particulars Unit Audited Audited Total Operating Income Rs. Crs 209.41 164.21 EBIDTA Rs. Crs 23.96 29.27 PAT Rs. Crs 23.49 6.44 Tangible Net worth Rs. Crs 64.05 70.49 Total Debt/TNW Rs. Crs 1.64 1.53 Current Ratio Times 0.33 0.45 On a provisional basis, the Company has reported revenue of ~Rs. 152 crs for FY19.

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