“The downgrade reflects the likelihood of higher-than-expected liquidity concerns post Ind-Ra’s further interactions with SRSL’s management amid falling global as well as domestic sugar realisations,” the credit rating agency said.
Coupled with high production costs, this reiterates the agency’s view of the company’s stressed profitability in FY16, it added.
“Liquidity stress is further indicated by SRSL’s almost-full utilisation of fund-based limits and minimal cash balances.”
The Outlook on Shree Renuka Sugars is also negative, the agency said.
The company’s projected standalone operating cash flow in FY16 is likely to be insufficient to service the scheduled standalone repayments (maturities of long-term loans) of INR4.1bn, the agency said.
Ind-Ra believes the cash flow mismatches will pressurise borrowing costs.
The Negative Outlook also states the agency’s negative stance on the sugar industry.
The agency expects the credit and liquidity profile for most sugar players in FY16 to deteriorate significantly from FY15 levels.
Ind-Ra expects the sugar surplus to extend to SS16 and continue to reflect in depressed sugar realisations, which currently are at a seven-year low at 11.75 cents/pound.
The average sugar realisations (pricing) have corrected 14.3% yoy to 14.6 cents per pound based on the average 12 months realisations ended June 2015, it said.
Average domestic sugar realisations declined 10.1% yoy to INR28.5/kg to Rs 31.7 per kg by June end.
“The ratings are, however, underpinned by the significant scale and integrated nature of SRSL’s operations (presence across distillery, co-generation) which enable it to mitigate the effects of the sugar down-cycle. The ratings also reflect around two decades of the founders’ experience as well as the company’s proximity to the sugar producing belt of Maharashtra and Karnataka with high recovery levels (11%-12%),” the agency added.
For the purpose of its analysis, the agency has taken a consolidated view of SRSL, which includes the standalone entity (Indian operations) as well as its domestic and overseas subsidiaries (Brazilian operations).
It said it could revise its outlook to stable if the company is able to successfully refinance its short-term debt with longer-term debt and/or the sale of non-core investments, which India Ratings feels will result in a sustained improvement in the adjusted net leverage.
On the other hand, uncertainty with regards to the refinancing of the company’s repayment obligations comprehensively or sugar realisations remaining at or below the current levels, resulting in EBIDTA erosion and consequently deterioration in the net adjusted leverage will result in a further rating downgrade, the agency said.
Shree Renuka operates seven sugar mills in India with a total crushing capacity of 8.4million metric tons per annum or 42,000 tons crushed per day. It also has two port-based sugar refineries with a total capacity of 2.3mmtpa. SRSL also has a significant presence in South Brazil, through the acquisitions of Renuka Vale do Ivai and Renuka do Brazil (59.4% owned).