ICRA has reaffirmed the long term rating of Dalmia Bharat Sugar and Industries Limited (erstwhile Dalmia Cement (Bharat) Limited) (referred as DBSIL) at LAA- (pronounced as L Double A minus) (removing the rating from being under watch with developing implications) for Rs 600 crores of fund based bank limits and Rs 300 crores† of Non Convertible Debenture (NCD) programme†. ICRA has also reaffirmed the short term rating of A1+ (pronounced as A one plus) (removing it from being under watch with developing implications) for an amount of the Rs. 200 crores on Non-fund based bank limits and Rs 200 crores Commercial Paper/Short-Term Debt programme of DBSIL. ICRA has also assigned stable outlook to the long term ratings of DBSIL.

ICRA rating action factors in the demerger of existing cement business into a separate company, i.e. Dalmia Bharat Enterprise Limited (DBEL) along with power generation assets, refractory operations and liquid and strategic investments (including holding in OCL Limited) and continuance of DBSIL predominantly an integrated sugar player. While, demerger of cement operations will lower the diversification benefits for DBSIL (erstwhile DCBL), ICRA has taken a note of the significant deleveraging of DBSIL‟s balance sheet post demerger of cement business and pre-payments of sugar segment loans. The ratings draw support from DBSIL‟s significant size of sugar operations and forward integration of DBSIL into cogeneration and distillery businesses, and the favourable changes in Uttar Pradesh (UP) government cogeneration policies and installing multi fuel boiler is likely to further enhance this strength. ICRA rating also factors in favourably healthy liquidity position of DBSIL as reflected by significant unutilised bank limits and strengths arising out of being a part of the Dalmia group of companies. These strengths are however offset by vulnerability of DCBL‟s sugar operations to government policies relating to cane pricing and sugar release mechanism. ICRA has taken note of deterioration in outlook on the sugar sector and significant correction in the domestic sugar prices, with prices having dipped below the cost of production in few states including Uttar Pradesh, which has resulted in inventory write offs for mills (including DBSIL) in Q111.

Till FY 2010, the main businesses of the company included cement and sugar, which together contributed to around 95% of the turnover of the company; the balance being contributed by other businesses. However, cement business which alone has been accounting for more than 60% and 70% of revenues and operating profitability, respectively, is being de-mergered into a separate company, i.e. Dalmia Bharat Enterprise Limited (DBEL) along with power generation assets, refractory operations and quoted and unquoted investments (including holding in OCL). The scheme of demerger is going to be effective from April 1st 2010. Subsequent to demerger, DBSIL to primarily hold sugar and allied businesses and other renewable assets of group. Overall, on one hand, demerger to decouple the earning and risks of cement business from DBSIL and on other hand this to result in company‟s high level of exposure to inherent cyclicality in the sugar business, vulnerability of sugar operations to agro-climactic factors and government policies. Going forward, DBSIL's credit metrics to be governed by performance of sugar operations mainly along with some from other businesses such as windmills and magnesite mining.

During SY 2009-10, the sugar production in India showed a growth to around 18 million MT because of better sowing in SY 2008-09 and favourable agroclimatic conditions in several key growing areas.

However, in spite of this growth, the production remained well short of both the domestic consumption (of around 23 million MT) as well as past highs of 26-28 million MT seen in SY 2006-07 and SY 2007-08. Thus at the beginning of SY 2009-10, domestic supply-demand situation remained tight and sugar prices peaked at around Rs. 40/kg in January and February 2010. DBSIL sugar realisations also reported significant improvement to Rs 27417 per ton in FY 2009-10 from Rs 17094 per ton in FY 2008-09. Over the same period, company also reported an increase in sugar sales volumes to 1.84 lac ton in FY 2009-10 from 1.62 lac ton in FY 2008-09, backed by imports of raw sugar of 0.66 lac ton and improved crushing levels (to 15 lac ton in SY 2009-10 as against 12 lac ton in SY 2008-09) & recovery rates (to 9.2% in SY 2009-10 as against 8.9% in SY 2008-09).

Nonetheless, government of India (GoI) measures (such as zero duty imports, tight inventory restrictions) to check price rises coupled with correction in international sugar price from over USD 700/MT to less than USD 500/MT by March 2010 on anticipation of stronger production in Brazil led to significant decline in sugar prices since March 2010. Presently, sugar prices have steeped down to levels of Rs. 26-27/kg in Northern India markets. At these realisations, sugar prices indeed dipped below the high cost of production (on account of higher cane costs) in few states including Uttar Pradesh, which has resulted in inventory write offs for mills (including DBSIL) in Q111.

ICRA expects the sugar production for SY 2010-11 to outstrip domestic consumption and pressure on sugar prices to continue in medium term. With the sugar prices under pressure, cane price in upcoming season to remain critical for profitability for sugar operations. Notwithstanding the above, some recent developments such as international prices have firmed up significantly in the last few months re-export of imported sugar, moderately lower than expected sugar production in Brazil etc to provide some support levels to sugar realisations in near term.

DBSIL's sugar business operates sizable capacity of 22,500 Tonnes of cane Crushed per Day (TCD) including capacity of 7500 TCD each at Ramgarh, Jawaharpur in eastern UP, and Nigohi in Central UP. Sugar operations of the company are operational efficient as marked by healthy recovery rates ranging between 9.03% to 10.6% over the last few years. Moreover, all these three sugar plant are fully forward integrated with cumulative power cogeneration of 79 MW and distillery of 80 Kilo Liters Per Day (KLPD) at Jawaharpur. The integrated nature of operations coupled with the improved performance of other businesses‡, has been partially insulating profitability from vagaries of the sugar cycle. In addition, profitability from cogeneration to receive substantial fillip from favourable changes in UP government cogeneration policies permitting higher exports of power as well as healthy tariffs rates. DBSIL has recently also converted one of its boilers into multi fuel boiler allowing the company to generate and export higher power at remunerative rates. Company reported (co-gen) power export of 136 million units (MUs) in FY 2009-10 at healthy average tariff rates of Rs 3.86per unit as against 137 Mus in FY 2008-09 at a tariff rate of Rs 3.05 per unit.

Overall, improved sugar realisations coupled with higher sugar sales volumes and income from power exports resulted in healthy sales growth for sugar segment of DBSIL in FY 2009-10. Though profitability of sugar operations for FY 2009-10 remained constrained on account of payment of higher cane costs for SY 2009-10. In FY 2009-10, sugar segment reported operating profits of Rs 99 crores on an operating income (OI) of Rs 587 crores as against operating profits of Rs 60 crores on an operating income (OI) of Rs 361 crores in FY 2008-09. ICRA has also taken a note of improved profitability of the other businesses (which are to continue as part of DBSIL), which is expected to support the bottom line positively.

As mentioned above, till FY 2010, DBSIL operating performance was majorly reflected by cement segment performance. Cement capacity, more than doubled to 8.2 million ton per annum (MTPA) over last two years (from 3.2 MTPA at a single location at Dalmiapuram, Near Trichy), with the commissioning of 2.5 MTPA Kuddapah plant in Andhra Pradesh (AP) in March 2009 and 2.5 MTPA Ariyalur plant in Tamil Nadu (TN) in September 2009. With commissioning of these capacities cement business also reported y-o-y growth in sales volumes of around 20%, this was as against pan India growth of 11 % over the same period. Nonetheless, these expansions were under stabalisation during the initial months, impacting the overall capacity utilisation levels of cement business during FY 2009-10. These expansions in Andhra Pradesh (AP) also have a bearing on the geographical profile/presence and have led incremental exposure to this region within southern India which has the maximum capacity in South. Over the last year, cement realisations in key markets of Tamil Nadu and Kerala, were also impacted by spill over from AP markets and a round of sizable expansions in its key markets. These structurally lime deficit markets have otherwise been enjoying remunerative realisation backed by freight differentials. Overall, lower realisation coupled with higher operating expenses during FY 2009-10 impacted the cement operating profits adversely. Cement business of erstwhile DCBL reported operating profits of Rs 340 crores on Operating Income (OI) of Rs 1417 crores in FY 2009-10 as against operating profits of Rs 454 crores on OI of Rs 1293 crores in FY 2008-09.

DBSIL reported an Operating Income (OI) of Rs 2194 crores in FY 2009-10 representing a growth of 23% over OI of Rs 1779 crores in FY 2008-09. This growth was backed by higher sales volumes under the erstwhile cement business and both healthy sales volumes and significant increase in sugar realisations during FY 2009-10. However, lower cement realisations coupled with higher fixed costs (with the under utilisation of newly commenced cement operations) impacted the operating profitability adversely in FY 2009-10. At the net levels, profitability also got impact by higher interest and financial charges. Low capacity utilisation coupled with lower profitability under cement business impacted the overall return indicators of the company adversely in FY 2010. Moreover, debt funded capex under the cement business resulted in increased debt levels and gearing for the overall company. Nonetheless, ICRA expects significant deleveraging of DBSIL‟s balance sheet post demerger of cement business along with the recent pre-payments of sugar business loans. ICRA has also taken a note of sufficiently long tenure debt profile of the company, with sizable portion of low cost soft loans.

ICRA rating also factors in favourably healthy liquidity position of DBSIL as reflected by significant unutilised bank limits. ICRA has also taken a note of equity arrangements of Rs 750 crores by private equity Kohlberg Kravis Roberts (KKR) in Dalmia Group Company (Avnija Properties Limited), this is expected to significantly strengthen liquidity position of the group in short to medium term.