Jamakhandi Sugars Ltd

Rating Rationale

05 Feb 2020 Jamakhandi Sugars Ltd

Brickwork Ratings reaffirms the rating for the bank loan facilities of Rs. 252.86 Crs of Jamakhandi Sugars Ltd (‘JSL’ or the ‘Company’)

Particulars: Amount (Rs Crs) Ratings^ Tenure Facility Previous Present Previous Present Fund based:

Cash Credit 110.00 125.00 Long term BWR B+/Stable BWR B+/Stable Cash Credit (Proposed) 30.00 25.00 Term Loan 100.59 102.86 Total 240.59 252.86 Rupees Two hundred Fifty Two Crores and Eighty Six Lakhs Only Please refer to BWR website www.brickworkratings.com/ for definition of the ratings; Details of Bank facilities are provided in Annexure-I; ^ Rating moved to Not Reviewed Advisory on 25 Feb 2019 Rating Action/Outlook

The rating reaffirmation factors the management’s experience in the sugar industry, integrated operations, proximity of the plants to sugarcane cultivation areas, established relationships with clients and suppliers and turnaround in operations in terms of profitability during FY19. The rating is, however, constrained by the decline in revenue in FY19, below average financial risk profile marked by weak debt protection metrics, high debt repayment obligations, high gearing level, large inventory levels and weak liquidity position and working capital intensive nature of operations. The rating continues to reflect the exposure to cyclicality and regulatory changes in the sugar industry.

The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. BWR believes Jamakhandi Sugars Ltd’s business risk profile will be maintained over the medium term. The outlook may be revised to Positive if a sustained increase in scale of operations and higher than envisaged profitability result in an improved financial risk profile and better gearing and debt protection metrics. The outlook may be revised to Negative if lower than expected revenue or profitability, a stretch in the working capital cycle, delay in obtaining enhancement in working capital limits , sizeable, unanticipated capex or weakening gearing impact the financial risk profile.

Key rating drivers

Credit Strengths: ● Experienced management: The promoter directors have more than a decade of experience in the sugar industry. Mr. Anand S Nyamagouda, MLA of Jamakhandi Constituency, is the Chairman of

Jamakhandi Sugars Limited. He is the son of Late Mr. Siddappa Bhimappa Nyamagouda (Ex-MLA and former Union Dy Minister), who founded the company in 1993. ● Established track record and and Locational advantages: JSL has an operational track record of around 27 years. The Company operates with two sugar plants, cogeneration power plant and one distillery plant. The power generated is for captive use as well as supplied to the Government of Karnataka. The Company’s plant is located in Bagalkot district, Karnataka, which is a sugarcane belt of Karnataka. ● Integrated operations: The company has set up an integrated sugar plant with 8500 TCD sugar plants, 56.8 mW cogeneration plant and 60 KLPD distillery. The fully integrated facility leads to diversification of revenue profile offsetting cyclicality in the sugar business. Capacity utilisation was ~100% and sugar recovery was ~11% in FY19 as against capacity utilisation of ~90% and sugar recovery of 10.40% in FY18. 10.33 Lakhs MT sugarcane were crushed, 5.23 crs units of power generated and 1.18 Cr litres of ethanol produced in FY19. Sugar cane crushing days decreased to 105 days in FY 19 (123 days in FY19), however average crushing per day has increased to ~5892 MT in FY19 from ~5581 MT in FY18. ● Clientele & Suppliers: The Company enjoys established relationships with its clients and suppliers. JSL has been dealing with its top customers viz Britannia Industries Limited, Shah Pratapchand Pukhraj & Co., Shah Hirachand Dongarchand & Co., etc for more than 5 years. The required sugarcane is mainly procured from the local farmers.

Credit Weaknesses: ● Below average financial risk profile : The company’s risk profile continues to remain below average reflected by dip in revenue, weak debt protection metrics, high debt repayment obligations, high gearing level, large inventory levels and weak liquidity position. Company’s operating income for FY19 dipped to Rs. 403.37 Crs from Rs. 470.40 Crs for FY18, mainly due to the Government regulations. However, despite the dip in sales, the company has turned around to book a PAT of Rs. 0.06 Cr during FY19 as against the net loss of Rs. 12.08 Crs during FY18. Tangible net worth marginally improved to Rs. 94.12 Crs as on 31st March 2019 from Rs. 94.06 Cr as on 31 Mar 2018. The company continues to be financially leveraged as reflected by the Total debt/Tangible net worth level of 5.74 times and Total outside liabilities/Tangible net worth level of 8.70 times as on 31st March 2019. Debt servicing capabilities remained poor reflected by ISCR and DSCR of 0.98 times and 0.65 times respectively for FY19. Short fall to meet repayment obligations was met through fund infusion by the directors and banks have confirmed no instances of default in the debt repayment. ● Impact of market regulations on operating income: Government has imposed monthly sugar quota on sugar mills with a view to manage the situation of surplus production in the country and to stabilize the sugar prices. This has resulted in the decline of total operating income of the Company from Rs. 470.40 Crs in FY18 to Rs. 403.37 Crs in FY19.

● Working capital intensive nature of operations and high debt repayment obligations: As is inherent in the sugar industry, JSL’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 almost full in peak season. Besides, JSL has large scale debt funded capex and the profitability is significantly impacted by the high debt repayment obligations. ● 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 mill operations.

Analytical approach and Applicable Rating Criteria

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 increase its scale of operations, improve profitability, strengthen its liquidity and credit profile and manage its working capital efficiently would be the key rating sensitivities.

Positive

● Increase in revenue, sustained profitability, and sufficient cash accruals to service debt obligations. ● Improvement in the financial risk profile and liquidity

Negative ● Stretched working capital cycle and weakening of liquidity. ● Deterioration in key credit metrics owing to sustained pressure on revenue, profitability or a sharp rise in inventory levels.

Liquidity - Stretched: Utilization of working capital remains almost full over the last 12 months. Liquidity position is stretched as reflected by the Current ratio of 0.52 times as on 31 Mar 2019. Cash and Cash Equivalents were Rs. 7.82 Cr as on 31 Mar 2019. Debt obligations are around ~Rs.50 crs each for FY20 & FY21 and cash accruals are ~Rs. 25 Cr and ~Rs. 30 Cr for FY20 & FY21 respectively. Any shortfall is expected to be met through funding from the promoters.

About the Company Jamakhandi Sugars Limited (JSL) was incorporated in 1993 by Late Mr. S B Nyamagouda – MLA, Jamakhandi (Former Union Dy. Minister for Coal) at Jamakhandi, Karnataka. The company has set up an integrated sugar plant with an 8500 TCD sugar plant with 56.8 mW cogeneration plant and 60 KLPD distillery. The Company operates with two sugar plants; one at Hirepadasalagi, Bagalkot District (Unit I-5000 TCD & 29.8 mW) and another in Bijapur District (Unit II-3500 TCD & 27 mW). The distillery plant is located at Unit I. The Company is reported to have signed a PPA with the Government of Karnataka, for five years effective from January 2017 to December 2021 at a rate of Rs. 5.04 per unit. The customers include reputed players such as IOCL, HPCL, BPCL, Britannia Industries Ltd, Karnataka Breweries & Distilleries Ltd. and United Breweries Ltd. and traders from the states of Karnataka, Andhra Pradesh, Tamil Nadu, Kolkata, Maharashtra, Gujarat, Rajasthan, Delhi, etc.

Key Financial Indicators

31 Mar 2018 31 Mar 2019 Parameters Audited Audited Operating Income Rs. Crs 470.40 403.37 Operating Profit Rs. Crs 59.89 68.90 Net Profit Rs. Crs (12.08) 0.06 Tangible Net Worth (TNW) Rs. Crs 94.06 94.12 Total Debt/TNW Times 4.73 5.74 Current Ratio Times 0.50 0.52

During 9MFY20, on a provisional basis, the company has reported operating income of ~Rs. 317 Crs

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 - Nil

Rating History for the last three years: Facility Current Rating (Feb 2020) Rating History Amount Tenure Rating (Rs Crs) 25 Feb 2019 2018 23 Nov 2017 Fund based Cash Credit 125.00 Long BWR B+/Stable Cash Credit (Proposed) 25.00 Term Rating Not - BWR B+/ Reaffirmed Reviewed Stable Term Loan

102.86

Total 252.86 Rupees Two hundred Fifty Two Crores & Eighty Six Lakhs Only

Complexity Levels of the Instruments

For more information, visit www.brickworkratings.com/download/ComplexityLevels.pdf

Hyperlink/Reference to applicable Criteria

General Criteria Manufacturing Companies

Approach to Financial Ratios

Analytical Contacts Investor and Media Relations

Naveen S Senior Rating Analyst Board: +91 80 4040 9940 Ext: 346 Liena Thakur [email protected] Assistant Vice President - Corporate Communications Rajee R +91 84339 94686 Senior Director - Ratings [email protected] B: +91 80 4040 9940 [email protected]

1860-425-2742

Annexure I: Details of Bank Facilities rated by BWR Sl no. Name of the Bank Types of facilities Long Term Short Term Total (Rs. Crs) (Rs. Crs) (Rs. Crs) 1 Cash Credit 35.00 - 35.00 State Bank of India Pledge Loan (WC) 65.00 - 65.00 Term Loan 9.84 - 9.84 2 Pledge Loan (WC) 25.00 - 25.00 Union Bank of India Proposed CC 25.00 - 25.00 3 - Term Loan 81.20 81.20 BDCC Bank 4 IFCI Ltd - Term Loan 11.82 11.82 (Sugar Development Fund) 252.86 - 252.86 Total Note: In addition, the company enjoys fund based facilities totalling Rs. 155.87 Cr, including Pledge Loan of Rs. 90.00 Cr and Soft loan of Rs. 23.96 Cr from BDCC Bagalkot, Soft loan of Rs. 17.93 Cr from BDCC Vijayapura and IREDA loan of Rs. 23.98 Cr. These facilities are not rated by BWR at the request of the company

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