Indushankar Chini Udhyog Limited gets satisfactory rating from ICRA for long term and short term fund based limits

ICRA Nepal has assigned the long-term rating of [ICRANP] LB to the NPR 410-million long-term loans of Indushankar Chini Udhyog Limited (ICUL or the company). ICRA Nepal has also assigned the short-term rating of [ICRANP] A4 to the NPR 1,337.50 million fund-based limits and the NPR 10 million non-fund based limits of ICUL.

The ratings are constrained by a significant threat to the domestic sugar mills from cheaper imports. During the last two years ending FY2018, the sugar price has slumped globally making imports cheaper. In FY2018, imported sugar was available at lower price point vis-à-vis the local produce, affecting the offtake of local producers. In a move to protect the domestic producers from the cheaper imports, the Government of Nepal (GoN) has gradually increased the custom tariff from 15% till FY2018 to 30% in FY2019 and 40% for FY2020. It has also restricted the sugar imports to 100,000-metric tons per annum from early FY2019. However, overproduction and softening of sugar prices on the international market is likely to continue over the near term and the effectiveness of the enhanced import tariff/ restrictions to protect the domestic players remains to be seen.

The ratings of ICUL also remain constrained by its weak financial profile characterized by high gearing, stretched coverage indicators and tight liquidity position. ICUL’s working capital intensity spiked in FY2018 amid weak offtake of sugar caused by cheaper imports; resulting in a significant increase in inventory days. Coupled with the dividend outflow in FY2017 and weak cash accruals, ICUL’s reliance on external working capital financing increased, thereby increasing its gearing (5.8 times in mid-July 2018 against 2.4 times in mid-July 2017) in the current high interest rate regime. ICUL reported operating and net losses in FY2018 because of the sharp decline in sales and inventory write down; causing deterioration in the debt coverage indicators of ICUL. Similarly, the liquidity position of the company also remains weak because of increased working capital intensity, declining margins, low net cash accruals and dividend outflow in FY2017. This has led to a sustained need for external financing through promoter loans and occasional over utilization of its drawing power. The ratings also remain constrained by IUCL’s dependence on milling operations for its entire revenue, which has led to volatility in profitability. Even with the limited co-generation and distillery operations (proposed from FY2020 onwards), the contribution from the same is likely to remain small.

Nonetheless, the assigned rating factors in the long track record of ICUL (operating since 1984) and its experienced promoter group. The rating also factors in the positive demand outlook for ICUL, given the growing domestic sugar consumption and inadequate domestic production in Nepal. The rating also derives comfort from the established sales channel (with over 50 distributors) and moderately diversified customer profile of ICUL. The ratings also factor in the duty protection accorded to the domestic industries by the GoN through import barriers on finished sugar, including the recently introduced quantitative import ceiling.

Indushankar Chini Udhyog Limited (ICUL) was incorporated in 1984 as a public limited company. It is one of the large and established players in domestic sugar manufacturing segment with installed sugarcane crushing capacity of 4,500 TCD (tons crushed per day). ICUL accounts for ~15% of the industry capacity of ~30,000 TCD, in a fragmented sugar industry of Nepal. ICUL manufactures and sells the M-30 grade white plantation sugar under the brand name RajHans. The company’s distribution channel comprises wholesale dealers who then pass on the sugar to retail traders and finally to the consumers.

ICUL is a family-owned business wherein Mr. Rajesh Kumar Kedia and his family members hold the entire equity stake. As on mid-April 2019, the company’s only sugar manufacturing unit is located in the Hariwan city of Sarlahi District in South-Eastern Nepal. The sugarcane required for the manufacturing process is procured mostly from the local farmers of Sarlahi and adjoining districts of south eastern Nepal. The company plans to commission a 3-MW co-generation unit from crushing year 2019 (which falls in FY2020, starting December 2019) for which the power purchase agreement with the Nepal Electricity Authority has been signed. ICUL also plans to start a 30-KLPD distillery unit from crushing year 2019. As on mid-April 2019, the company’s distribution channel comprised a network of around 50 distributors across the country.

Source: ICRA Nepal