Rationale

 The rating revision factors in the expected improvement in Shree Chhatrapati Shahu Sahakari Sakhar Karkhana Limited’s (Shahu Sugar) cash flows because of expected improvement in cane crushing, sugar sales, healthy sugar realisations and expectations of these to remail comfortable (due to production of more value added Sulphur-less sugar), higher ethanol production from the expanded multi-feed distillery (expanded from 60 KLPD to 180 KLPD) aiding profitability as well as working capital cycle, and comfortable cushion in working capital limits (enhanced to Rs. 285 crore from Rs. 195 crore). Curtailment of sugar sales and ethanol production by the government during FY2024, in light of expected lower sugar production, had resulted in excess sugar stock build-up as on March 31st, 2024. The same is expected to come down during FY2025, with expectation of higher sugar sales quota allocation (domestic as well as exports) as well as higher diversion towards ethanol. The rating continues to draw comfort from the company’s long operational history and its locational advantage resulting in an adequate cane availability, further ensuring high operational efficiency. The rating also favourably factors in the forward integration of sugar operations into power cogeneration and distillery business, which provides the necessary cushion to the company’s profitability against the cyclicality in sugar operations. Further, favourable Government policies towards the sugar industry in the form of soft loans, sugar export subsidy and interest subvention schemes, among others, also support the profitability metrics of the sugar mills to an extent. However, the rating continues to be constrained by the company’s weak profitability and high working capital intensity, mainly because of the year-end sugar inventory build-up and the vulnerability of its profitability to volatility in sugar prices. Sizeable debt funded capex during FY2024-Q1FY2025 has also significantly increased debt levels, leading to moderation in debt capitalisation and coverage metrices. The rating also remains constrained by the sizeable debt repayments in the near term. Further, the rating also considers the company’s exposure to the inherent cyclicality in the sugar industry; the agro-climactic risks related to cane production and the Central Government’s policies on sugar trade, and pricing of cane, sugar and ethanol. The stable outlook reflects ICRA’s expectation that the company would be able to ensure adequate cane availability, given its strong relations with farmers, which along with its integrated operations would support its revenues and profitability.