Rationale

 The rating outlook revision to positive for the debt programmes of Dwarikesh Sugar and Industries Limited (DSIL) reflects the likely healthy growth in its revenues and profits in FY2022, while maintaining a comfortable credit profile. ICRA notes that the expansion in revenues as well as profits in FY2022 would be driven by firmed-up domestic and international sugar prices, supported by increased ethanol volumes and improved blended distillery realisations with favourable change in feedstock mix for ethanol production. ICRA expects the company's revenues in FY2022 to grow by 7-12% over the previous year, with higher revenues from the distillery division, led by enhanced capacities and improved realisations, despite some moderation due to the likely reduction in sugar volumes. Further, higher sucrose diversion towards B-heavy molasses/juice-based ethanol would moderate the inventory levels and lower its working capital borrowing levels going forward, which would allow its coverage metrics to emerge stronger. Additionally, DSIL is in the process of setting up a new distillery of 175-KLPD capacity at an investment of around Rs. 232 crore (~80% debt funded). The commercialisation of this new distillery would strengthen its operational profile and improve revenue diversification. The ratings continue to factor in DSIL's efficient operations with one of highest recovery rates in Uttar Pradesh (UP). Moreover, being forward integrated into co-generation and distillery operations, the company benefits from access to alternate revenue streams, which acts as a cushion against the cyclicality of sugar business. ICRA notes that the introduction of the minimum support price (MSP) for sugar in FY2019 gives some protection against any downside in the operating profits in sugar surplus years compared to the past. Over the medium term, DSIL's operating profits are likely to be less volatile than the historical levels, driven by the expected continuation of MSP and the industry's focus on diverting of excess cane towards ethanol production. The ratings remain constrained, however, by the vulnerability of DSIL's profitability to the cyclical nature of the sugar industry (though the sharp fall in sugar prices is curtailed after the introduction of MSP) and agro-climatic risks related to cane production. Further, the profitability of sugar mills, including DSIL, remain vulnerable to the policies of the Government of UP (GoUP), sugar international trade, sugar domestic quota, sugar and ethanol pricing and interest subvention loan for distillery capacity expansion.