Mumbai: Credit rating agency, ICRA has assigned rating of LBBB- to the Rs 6010 million fund based limits/Long term loans of Dwarikesh Sugar Industries (DSIL). This is the moderate-credit-quality rating assigned by ICRA to long term debt instruments.ICRA`s investment grade rating reflects DSIL`s significant size of operations with a crushing capacity of 21,500 tcd, long track record of satisfactory operations in its two older units and adequate forward integration into distillery and cogeneration, which will make the company`s profitability relatively less vulnerable to price cyclicality in the sugar business in the future once the expanded capacities reach optimal utilization.
ICRA has also drawn comfort from improvement in the company`s profitability and accruals during H1 SY?? 2008-09 following the improvement in demand supply scenario in sugar industry and favorable outlook for sugar realizations (though improvement in the contribution margins is likely to be impacted by high cane prices).
The rating is however constrained by the relatively high financial risk profile arising out of loss making in SY07 and SY 08 (and the relatively high gearing of 4.97 times for the company as on 30th September, 2008.
The company has been reporting losses in the past two financial years because of pricing pressures arising out of supply overhang in SY 2006-07and SY 2007-08, poor utilization of the enhanced crushing capacity on account of insufficient cane availability and the high interest costs arising out of the substantial debt funding of the capacity expansions.
While the gearing is expected to remain high in the medium term (although lower than in Sep 2008), ICRA has driven comfort from the relatively longer tenure of its debt following restructuring of its term loans.
Also, with DSIL having expanded its capacity from 14000 tcd to 21,500 tcd and the prevailing deficit in cane production, ensuring cane availability during SY10 and SY11 will remain a challenge.
Further, the rating factors in regulatory risks regarding off take and pricing of by-products such as molasses, alcohol and power and agro climatic risks and cyclicality inherent in the business.
ICRA has also taken note of the fact that Uttar Pradesh (UP) based sugar mills have challenged the state advised price (SAP) fixed by the Government of UP for the SY 2007-08.
The fixation of cane prices for SY 2007-08 would thus remain a key rating sensitivity
Shares of the company gained Rs 1.35, or 1.27%, to settle at Rs 107.65. The total volume of shares traded was 69,424.00 at the BSE (Tuesday).
Source: myiris.com
September 01, 2009
