DCM Shriram defies market mood, hits new high; stock up 65% in a month

Shares of DCM Shriram hit a new high of Rs 1,199 on the BSE after they rallied 18 per cent on the back of heavy volumes in intra-day trade on Monday in an otherwise weak market. At 01:11 pm, the stock was trading 14 per cent higher at Rs 1,157 as compared to a 1.3 per cent decline in the S&P BSE Sensex. The trading volumes on the counter jumped three-fold, with a combined 2.34 million equity shares having changed hands on the NSE and BSE.

In the past one month, the stock of DCM Shriram has zoomed 65 per cent, as against a 0.20 per cent rise in the Sensex. The company reduced its net debt to Rs 180 crore as on March 31, 2021, from Rs 1,623 crore as on March 31, 2020. The reduction in debt was led by lower sugar inventory and significantly lower fertiliser subsidy outstanding. A judicious approach to capex and working capital across businesses also led to lower net debt.

DCM Shriram is a diversified company with interests in agri-value chain (urea, sugar, seeds and trading of agri-inputs) and the chloro-vinyl chain (chlor-alkali and PVC). Apart from these, the company is involved in certain other related businesses to take advantage of vertical integration, such as Fenesta Building System (UPVC doors and windows), cement (produced at its integrated Kota plant) and PVC compounding (50:50 JV with Axiall Inc., USA).

On June 29, 2021, rating agency ICRA had upgraded term loan and fund based facilities of DCM Shriram to ICRA AA+ from ICRA AA with a stable outlook. The rating revision factors in the significant decline in DCM Shriram’s net debt levels, driven by the improvement in the working capital cycle of the fertiliser and sugar segment, leading to net debt/OPBDITA of 0.1x times as on March 31, 2021, and the likelihood of the same remaining comfortable going forward.

The clearing of subsidy backlog in the fertiliser segment due to the release of additional subsidy by the government of India in FY2021 and diversion of sugar towards ethanol production leading to lower sugar inventory will lead to lower working capital requirements.

The company has completely exited the bulk fertiliser sales under the Shriram Farm Solution (SFS) business and is focussed on selling value-added products, which has also resulted in improved profitability and moderation in the working capital cycle. As a result of all these factors, the overall working capital requirement and working capital debt has come down and is expected to remain lower than the past years which should lead to better capitalisation and coverage ratios.

The rating upgrade also factors in the improvement in the cost structure of the company driven by the commissioning of the 66 MW power plant at Kota in FY2020 and further improvement expected post commissioning of the 120 MW power plant in Bharuch in FY2022.

Going forward, the revenues, profits and cash accruals are expected to grow owing to anticipated improvement in the Electro Chemical Unit (ECU) realisations of chlor-alkali business, healthy performance of the sugar segment and increasing scale and profitability of the SFS business of the company, ICRA said in its rating rationale.