Rationale

 The revision in the outlook to Negative on Dwarikesh Sugar and Industries Limited’s (DSIL) long-term rating factors in a significant dip in its revenue and profitability in H1 FY2025 compared to H1 FY2024 on account of lower sugar and ethanol sales. The company reported an OPBDIT1 loss of Rs. 20.7 crore in H1 FY2025 against an OPBDIT profit of Rs. 105.8 crore in H1 FY2024. The company’s SY22024 crushing season was completed in March 2024 compared to the extended operations till May in the earlier sugar years on account of red rot infestation in the command area for all its three units in Uttar Pradesh (UP). The absence of crushing operations in Q1 FY2025 adversely impacted sugar sales in H1 FY2025 and reduced the feedstock available for ethanol. This, coupled with the restrictions imposed on the diversion of sugar towards ethanol in ESY32024, also pulled down the ethanol sales in H1 FY2025. The revenues and profitability are expected to improve in H2 FY2025 due to resumption of crushing operations from November 2024, supported by the various steps taken by the company to resolve the red rot infestation issue and the removal of cap on sugar diversion for ethanol production by the Government of India for ESY2025. Overall, ICRA expects the performance in FY2025 to remain weaker than the earlier estimates, with a moderation in profitability margins and debt coverage indicators compared to FY2024. The extent of the improvement in revenues and profitability over the coming quarters remains a key monitorable for the company. The ratings continue to positively factor in DSIL’s efficient operations with comfortable recovery rates in the past that have supported its credit profile over the years. Moreover, being forward integrated into co-generation and distillery operations, the company benefits from access to alternative revenue streams, which act as a cushion against the cyclicality of the sugar business. ICRA also notes the comfortable capital structure of the company with a gearing of 0.3 times as on September 30, 2024.

The ratings, however, continue to be constrained by the vulnerability of DSIL’s profitability to the cyclical nature of the sugar industry (though the sharp fall in sugar prices has been curtailed after the introduction of MSP) and the agro-climatic risks related to cane production. Further, the profitability of sugar mills, including DSIL, is exposed to the policies of the Government of UP (GoUP) and the Central Government on cane prices, sugar international trade, domestic sugar quota, policy related to ethanol blending, sugar and ethanol pricing and interest subvention loan for distillery capacity expansion.