The 3D future of data centres

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January 27, 2023

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Key messages

Revenue growth to remain subdued this fiscal and the next

• Decline in exports to 7.5-8.0 million tonne this sugar season (SS) to lower export revenue

• Increasing revenue from sale of ethanol, together with higher domestic sales, will offset the impact of reduced exports

• Rising share of distillery revenue to meet the government’s ethanol blending target to support revenue of integrated millers

• Non-integrated millers revenue growth to be driven mainly by higher domestic volumes, with domestic realisations remaining flattish

Operating profitability to contract ~200 basis points this fiscal and stabilise in the next

• Flattish domestic sugar prices, absence of export subsidy, increase in fair and remunerative prices (FRP) for sugarcane to impact margins this fiscal

• For integrated millers, the impact will be partially offset by higher distillery revenue, which is also more remunerative

• Increase in the minimum support price (MSP) of sugar remains a key monitorable; no change in MSP witnessed since 2019

Credit outlook largely ‘stable’

• Working capital borrowings to remain flat with carryover sugar stock remaining modest; was at a 5-year low at the end of SS22

• Limited long-term debt addition expected and mainly for distillery expansion

• Debt protection metrics to be moderately affected by lower profitability yet remain adequate. That said, impact on non-integrated

players to be higher compared to integrated players.

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Sectoral trend

(4)

Revenue to remain stable this fiscal and the next

Domestic sugar sector revenues registered CAGR of 6.5% over the five fiscals through fiscal 2022

Source: Analysis of 28 players rated by CRISIL Ratings and listed, non-rated major players accounting for ~45% of total sugar industry estimated at ~Rs 120,000 crore

Increasing share of distillery revenue to offer stability Bumper production Sugar prices

crashed

Increase in MSP

Revenue from distillery business

All-time high exports

38,675

43,197

40,310

45,822

49,943 52,659 ~ 52,500 ~ 54,000

- 10,000 20,000 30,000 40,000 50,000 60,000

FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24P

(Rs crore)

• Sugar export volume to drop to ~75-8 million tonne this SS, and remain steady next SS

• Domestic sugar consumption growth will remain steady at 3%

• Share of distillery revenue to increase on the back of higher diversion of sugar for ethanol manufacturing

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Steady improvement in acreage to drive production; weather conditions will bear watching

Continued bumper cane production is crucial; monsoon to remain monitorable

Source: CRISIL Ratings, CRISIL MI&A Research, Indian Sugar Mills Association (ISMA), SS: sugar season (October-September) Note: Assuming no change in under-cultivation

Surplus water availability, good monsoon, and high reservoir level to support cane production

-5% -9%

10% 9%

-1%

7% 8%

-4% -3%

35%

19% 15% 19%

10%

FY18 FY19 FY20 FY21 FY22 FY23E FY24P

Rainfall as % of LPA Variation in reservoir level as % of average 10-year level

306 377 429 372 429 500 ~485 ~525

-12

23

14 13 15 17

2-4%

8-10%

4.4 5.6-5.8

-15 -10 -5 0 5 10 15 20 25

0 100 200 300 400 500 600

SS16-17 SS17-18 SS18-19 SS19-20 SS20-21 SS21-22 SS22-23E SS23-24P

Cane production (in million tonne) y-o-y increase in cane production Cane acreage (per million hectare)

Note: Trends are based on CRISIL Ratings’ sample set. Normal monsoon – total rainfall between June and September (southwest monsoon) within -10% to +10% of long period average (LPA) rainfall Source: CRISIL Ratings, Indian Meteorological Department, company sources

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Production to remain stable, enabling higher diversion towards ethanol

Source: CRISIL Ratings, CRISIL MI&A Research, ISMA (Million

tonne)

(Million tonne)

Source: CRISIL Ratings, CRISIL MI&A Research, ISMA

20.3 32.6 33.2 0.3 26.5 0.9 30.7 2 36.0 3.4 ~35.5 ~4.5 ~36.3 ~5.5

10.4%

10.7%

11.0%

10.7% 10.6%

10.1%

~10.0%

~9.8%

8.5%

9.0%

9.5%

10. 0%

10. 5%

11. 0%

11. 5%

0 5 10 15 20 25 30 35 40

Sugar production Diversion towards ethanol Average Recovery rate

8.8 11.2 13.2 12 10.2 10.2

5

11 10.5

5.2 10 13.7

2.1

4 3.8

3.1 4.2

6.2

0 5 10 15 20 25 30 35 40

Uttar Pradesh Maharashtra Karnataka Tamil Nadu Others

20.7 32.6 33.6 27.8 30.7 36.0 ~35.5 ~36.3

Reduction in recovery rate due to higher diversion towards B-heavy ethanol

UP, Maharashtra account for two-thirds of total production (post diversion for ethanol)

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Increase in FRP and area under cultivation

3.4

10.7

14.5

10.3

8.0

5.8 ~6

32.5 33.2

26.5

30.7

36.0 ~35.3 ~36.3

24.5 25.9 25.0 26.0 27.0 ~28 ~29

0.5

3.5 5.7 7.0

11.2

~7.5-8 ~7-8

10.7

14.5

10.3

8.0

5.8 ~6 ~6

SS 17-18 SS 18-19 SS 19-20 SS20-21 SS21-22 SS22-23 P SS23-24 P

Opening Stock MT Production MT Consumption MT Exports MT Closing Stock MT

Rise in exports from SS19 helped millers reduce inventory

Source: ISMA, CRISIL MI&A Research, CRISIL Ratings

Exports to moderate from current SS with reduced carryover stock and continued diversion towards ethanol

• In SS21-22, the central government initially permitted 8-10 million tonne of exports, later increased to 11.2 million tonne due to bumper production

• In November 2022, the government permitted 6 million tonne exports for SS22-23, likely to increase to 7.5-8 million tonne, basis good cane output

Production impacted due to low acreage

Correction in inventory to sustain

(Million tonne)

Increase in exports led to inventory reduction

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International prices surpassed domestic prices in SS20-21; allowing GoI to remove export subsidy in SS21-22

Source: CRISIL MI&A Research, Department of Food and Public Distribution (Rs/ tonne)

21,940 26,661

24,087

29,589

26,694

28,605 33,497

36,872

42,782 39,107

27,702

31,050

32,028 36,255

38,217 37,365

Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22

White (London) M-30 Mumbai

Rs 6,000/ tonne Rs 4,000/ tonne NIL

Trend in global vs domestic sugar prices since SS16-17

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Steady discretionary consumption to support demand in SS23 and SS24

Increased demand from the chocolates & confectionary, non-alcoholic beverages segments within commercial consumption

24.8 (Million tonne)

41% 40% 40% 37% 37% 37% 37% 37%

59% 60% 60% 63% 63% 63% 63% 63%

-1.2% -1.2%

6.5%

-4.2%

4.0% 3.8% ~3.5%

~2.5%

-6. 0%

-4. 0%

-2. 0%

0.0%

2.0%

4.0%

6.0%

8.0%

0 5 10 15 20 25 30

Household Industrial y-o-y consumption Source: CRISIL Ratings, CRISIL MI&A Research, ISMA

24.5 26.1 25.0 26.0 27.0 28.0 ~28.6

44%

16%

17%

16%

7%

56% 38%

20%

18%

16%

8%

62%

SS16-17 SS21-22E

Hotels, restaurants, cafes Chocolates & confectionary Non-alcoholic beverages Biscuits & bakery products Catering services, stalls

Domestic consumption to remain steady

(Consumption share across segments) Commercial

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• Despite excess inventory owing to surplus production in SS18 and SS19, prices remained above the MSP and helped minimise losses for millers

• While domestic prices have been higher, MSP has remained unchanged at Rs 31/kg since SS20 and may increase given the increasing cane prices

Source: CRISIL Ratings, CRISIL MI&A Research, ISMA

1.6 5.2 6.7 4.9 3.7 2.6 ~2.5 ~2.5

37.6

30.8 30.6 31.4 31.2 32.2 ~32.3

~33.0

29 29

31 31 31 31

32

31.3

23.3 23.8

26.4

32.7

39.7 ~39 ~39

18. 0 23. 0 28. 0 33. 0 38. 0 43. 0

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0

SS16-17 SS17-18 SS18-19 SS19-20 SS20-21 SS21-22 SS22-23 P SS23-24 P

Closing Stock as months consumption Sugar Prices (S-30 Mumbai) MSP Sugar Price (International)

Rs/kg

MSP expected to increase by ~Rs1/kg in SS23-24 Introduction of

MSP at Rs 29/kg Sugar prices: Rs/ kg

MSP supports millers during weak cycles

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UP state advised price (SAP) jumped ~8% in SS21-22

Higher exports, ethanol diversion led to reduction in inventory, helping mills clear cane dues faster

5.2 6.7 4.9 3.7 2.6 ~2.5 ~2.5

13.7%

9%

13.6%

6.8%

5% ~5% ~5%

0 2 4 6 8 10 12 14 16

0 2 4 6 8

SS18 SS19 SS20 SS21 SS22 SS23 P SS24 P

% Arrears at the end of sugar season

Inventory (months) % Arrears

Cane arrears declining with better cash flow of sugar mills

Source: CRISIL Ratings, CRISIL MI&A Research, ISMA, Ministry of Consumer Affairs, Food & Public Distribution

305 315 315 315 315

340 ~340 ~350

242

268 275 275 285 290 ~298 ~307

SS17 SS18 SS19 SS20 SS21 SS22 SS23 P SS24 P

Uttar Pradesh (SAP) F&RP (S&M)

Source: CRISIL Ratings, CRISIL MI&A Research, ISMA, Ministry of Consumer Affairs, Food & Public Distribution

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Revenue, Profitability Trends & Credit outlook

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• CRISIL Ratings rates 28 large, integrated as well as small and mid-sized sugar mils (as on Sep 30, 2022), with total revenues of Rs.21,000 crore (fiscal 2022)

• ~46% of the rated sugar mills have investment grade ratings

Key rated entities

S. no. Company name LT rating ST rating Outlook

1 Balrampur Chini Mills Ltd AA+ A1+ Stable

2 E.I.D. Parry India Ltd AA A1+ Stable

3 Parry Sugars Refinery India Private Ltd A+ A1 Stable

4 SNJ Sugars and Products Ltd A- - Stable

5 Narmada Sugar Private Ltd BBB+ A2 Positive

6 Ramdev Sugars Private Ltd BBB+ - Positive

7 Shakti Sugar Mill Private Ltd BBB+ - Positive

8 Shrijee Sugar and Power Private Ltd BBB+ - Positive

9 A B Sugars Ltd BBB A3+ Stable

10 Deccan Sugar Private Ltd BBB A3+ Stable

11 Hanumant Sugars Private Ltd BBB - Positive

12 Dr. Patangrao Kadam Sonhira Sahakari Sakhar Karkhana Ltd BBB- - Stable

13 Venkateshwara Power Project Ltd BBB- - Stable

Source: CRISIL Ratings

CRISIL Ratings coverage on sugar mills

Rating distribution of Rs 14,607 crore debt

A & Above 56%

BBB 8%

BB & Below

36%

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Revenue to remain stable, profitability to see modest impact

Increasing diversion to B-heavy ethanol to partially arrest decline in profitability, despite lower exports

Source: Analysis of nine integrated rated players

Margins of integrated players healthy at over 12%

Source: Analysis of 28 CRISIL-rated players

Margins of non-integrated millers typically in mid-single digit

Source: Analysis of 19 non-integrated rated players

14.7%

7.0%

8.5%

9.9% 9.7% 10.8%

8.5-9% ~9%

0.0%

2.0%

4.0%

6.0%

8.0%

10. 0%

12. 0%

14. 0%

- 5,000 10,000 15,000 20,000 25,000

Integrated Revenue Non-Integrated Revenue Operating margin

(Rs crore)

12,898 14,678 14,616 16,363 17,279 19,915 ~19,500 ~20,500

(Rs crore) (Rs crore)

5,575 6,565 6,666 7,591 8,314 10,066 ~9,700 ~10,000 7.3%

4.5%

7.0% 7.7%

6.7%

8.3%

6-6.5%

5.5-6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

- 2,000 4,000 6,000 8,000 10,000 12,000

Operating Income Margin 7,323 8,113 7,950 8,773 8,964 9,849 ~9.800 ~10,500

19.4%

8.8% 9.5% 11.5% 12.2% 12.9% 11-11.5% 11.5-12%

0.0%

5.0%

10. 0%

15. 0%

20. 0%

25. 0%

- 2,000 4,000 6,000 8,000 10,000 12,000

Operating Income Margin

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GoI’s focus on ethanol-fuel blending leading to higher diversion of sugar

B-heavy molasses preferred owing to higher prices and no major additional investments

Source: CRISIL MI&A Research, ISMA, CRISIL Ratings

Increasing share of B-heavy ethanol to support margins, better cash flow generation

3-6% price rise across categories for SS22-23 reflects the government’s focus on incentivising diversion to meet 20%

blending target by 2025

C-heavy

B-heavy

Cane juice

Sugar* Ethanol* Revenue*^

*For 1 tonne of sugarcane crushed

^Based on the current prices

% Ebitda

100% 100%

83%

47% 33%

19% 13%

17%

47%

53% 70% 75%

7% 13% 11% 12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SS17 SS18 SS19 SS20 SS21 SS22 SS23 P

Ethanol production expected at 5.9 billion litre in 2023, in line with the Government of India’s (GoI) requirement of 5.4 billion litre to achieve ~13% blending rate; the same translates to sugar diversion of ~4.5 million tonne towards

ethanol 33.2

26.5

30.7

36.0 ~36 ~36.5

0.8 2.2 3.4 ~4.5 ~5.4

2%

7%

11% 12%

~14%

~17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0.0 5.0 10. 0 15. 0 20. 0 25. 0 30. 0 35. 0 40. 0

SS19 SS20 SS21 SS22 SS23 P SS24 P

Sugar Produced Sugar Diversion Sugar Diversion (Million tonne)

100-115 kg 11 litre 4223 9%

90-95 kg 22 litre 4376 12%

0 kg 85 litre 5576 31%

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Credit profiles to remain stable; debt protection metrics to moderate

Low debt addition limit moderation in debt metrics

Source: CRISIL Ratings

(Times) (Days)

3.00 1.85 1.99 2.07 2.70 3.62 ~2.8 ~2.5

1.85 1.87 1.94 1.93

1.52

1.20

1.40

1.60

- 0.50 1.00 1.50 2.00 2.50

- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Interest cover Adjusted gearing

246 100 219 117 296 136 224 101 223 108 194 96 ~200~110 ~205~105 146

101

160

122 116

98 ~105-115

- 20 40 60 80 100 120 140 160

- 50 100 150 200 250 300

Inventory+Debtors Creditors Net working capital

Net working capital cycle to remain relatively stable

Capital spend primarily for distillery expansion

• Capital expenditure (capex) will be primarily for distillery capacity addition

• Correction in inventory, stable collections will keep working capital requirements stable this fiscal and the next

• Lower working capital debt and modest capital spend will limit incremental debt requirement, partly offsetting impact of lower profitability on debt metrics

573

701

976

849

585

1,183

~900

~750

- 200 400 600 800 1,000 1,200

(Rs crore)

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Summary

• Revenue to remain stable this fiscal and the next with increasing consumption in household and commercial segments

• Operating profitability to contract upto 200 bps on-year this fiscal and improve slightly in fiscal 2024

• Lower carryover stocks and higher diversion of sugar for ethanol to impact exports this fiscal; exports to remain largely range bound next fiscal, assuming normal production

• Capex expected to be largely for distillery capacity addition

• Limited increase in long-term debt to fund capex, steady working capital borrowings will keep credit profiles of integrated players ‘stable’

• Credit profile of non-integrated players (no access to distillery and co-gen revenue) will remain largely ‘stable’, but debt metrics may see higher moderation compared with integrated players

• Increase in MSP of sugar, and any change in export quota, cane pricing, carryover stock policy and export realisations

remain monitorables

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