Experienced management along with integrated business model and diversified revenue stream
The company has established presence since 1939 in sugar industry and has established track record of over eight decades. The company is promoted by Mr. Kailash Chandra Seksaria and family. Mr. Seksaria has an experience of more than four decades in the aforementioned industry. The promoters have gained good insight about the industry over the years and have developed healthy customer and suppliers relations.

Furthermore, the company is forward integrated into cogeneration and distillery operations that de-risk the core sugar business of the company to some extent. TSBSFL operates a 8,500 tonne crushed per day (TCD) sugar plant in UP, which is forward integrated into power and alcohol business with bagasse-based cogeneration power plant with capacity of 32 megawatt (MW) and distillery with capacity of 81 kilo litre per day (KLPD) in FY2022.

Also, TSBSFL has a power purchase agreement with Uttar Pradesh Power Corporation Limited to sell power and tenders with oil marketing companies to supply ethanol at government-regulated rates. For the same, the company is likely to benefit from the government’s focus to incentivize ethanol production going ahead. During FY2022, the sugar division contributed to ~70.75 percent of the total revenue, the distillery division contributed around ~20.94 per cent of the total revenue, power division contributed around ~6.97 percent of the total revenue and balance 1.34 per cent is from bio compost and pesticide. The revenue of the company decreased to Rs. 558.41 crore in FY2022 (provisional) as against Rs. 662.17 crore in FY2021.  

Increased thrust on ethanol production
The government is promoting ethanol which will help it to save on the import bill and also helps sugar mills to reduce their dependence on sugar enabling them to clear the cane arrears. To promote ethanol the government has provided interest subvention, increased the price of ethanol, and fixed a separate price for B-heavy molasses based ethanol and ethanol from sugarcane juice etc. With the aggressive government approach to increase the ethanol blending program to 20% by 2030, sugar companies are witnessing a massive expansion of distillery capacities. Currently, sugar companies are able to supply only 70% of tenders floated by oil marketing companies. Accordingly, TSBSFL had improved the capacity of its distillery to 81KLPD in FY2022 and has further planned to expand the capacity of its distillery from 81KPLD to 166KPLD. The operating profit margin improved to 19.59 percent in FY2022 (provisional) as against 14.94 percent in FY2021 on account of increase in sales of ethanol.

Acuite believes that TSBSFL’s ability to improve its profitability on account of the improved distillery capacity will be a key rating monitorable.

Healthy Financial Risk Profile
TSBSFL’s financial risk profile is healthy with low gearing, healthy net worth, and comfortable coverage ratios. The net worth of the company stood at Rs.442.56 crore as on March 31, 2022 (provisional) as against Rs.252.96 crore as on March 31,2021. The gearing of the company stood below unit at 0.62 times as on March 31, 2022 (provisional) as against 1.00 times as on March 31,2021. The coverage ratios remain comfortable with interest coverage ratio of 10.07 times for FY2022 (provisional) as against 7.35 times for FY2021. The DSCR stood at 1.59 times for FY2022 as against 1.85 times for FY2021.The total debt outstanding of Rs.273.75 crore as on March 31, 2022 includes working capital borrowings of Rs.116.51 crore and term loan obligations of Rs.157.24 crore.

Acuite believes that the company’s ability to improve its scale of operations with the help of the debt funded capital expenditure while maintaining its capital structure will remain a key rating monitorable.

­Working Capital Intensive Nature of Operations
The operations of the company are of working capital-intensive in nature, marked by high GCA days of 240 days in FY2022(provisional) as against 177 days in FY2021. The high GCA days are on account of high inventory days of 282 days in FY2022 (provisional) as against 180 days in FY2021. The sugar cane procurement is generally higher by March, 2022, hence, the inventory levels tend to be higher across the industry during financial year ends. The debtor days are low and stood at 12 days in FY2022 (provisional) as against 21 days in FY2021. The creditor days stood at 26 days in FY2022 (provisional) as against 34 days in FY2021. The average utilisation of working capital limits is around 10-15%.

Acuite believes that working capital operations may continue to remain intensive considering the nature of industry.

Cyclical and regulated nature of sugar industry
The industry is cyclical by nature and is vulnerable to the government policies for various reasons like its importance in the Wholesale Price Index (WPI) as it classifies as an essential commodity. The government on its part resorts to various regulations like fixing the raw material prices in the form of State Advised Prices (SAP) and Fair & Remunerative Prices (FRP). All these factors impact the cultivation patterns of sugarcane in the country and thus affect the profitability of the sugar companies.