Rationale

 The ratings reaffirmation for the debt programmes of Avadh Sugar and Energy Limited (ASEL) factors in the healthy growth in its revenues, coupled with reduced debt levels in FY2021. The expansion in revenues by 6% YoY at Rs. 2,712 crore was driven by increase in domestic sales volume, improved sugar export realisations and higher sales of ethanol based on B-heavy molasses. While reaffirming the ratings, ICRA takes cognisance of the expected reduction in debt levels in the medium term, led by lower sugar inventories following increased higher diversion of cane towards B-heavy/juice–based ethanol in addition to likely reduced repayment obligations pursuant to refinancing of one of its term loan through longer repayment tenure. Further, its operating margins (OPM) are expected to improve going forward from the current levels, supported by the likely growth in sugar realisations along with increase in distillery volumes with higher proportion of ethanol produced through Bheavy route, despite expectations of increased cane cost. The ratings continue to factor in ASEL's long operational track record of over 85 years with reasonable scale. Moreover, its forward-integrated operations into co-generation and distillery business provides access to alternate revenue streams and acts as a cushion against the cyclicality in sugar business. Although ASEL enhanced its distillery capacity to 240 kilo litre per day (KLPD) in FY2021, the company is in the process of enhancing its ethanol capacity further to 320 KLPD with distilleries being flexible in terms of feedstock (C-heavy molasses/B-heavy molasses/sugarcane juice). ICRA notes the recently firmed up international sugar prices and sustained favourable Government policy framework such as continuation of MSP (introduced from FY2019), export subsidy, soft loans and interest subvention loans for ethanol expansion. Additionally, ICRA considers the recent advancement of enhanced ethanol-blending timelines that would allow integrated players like ASEL to report lesser volatility in operating profits against the historical levels.