Sembcorp Industries could bank on Indian business recovery

Its renewable generation pumped in $15-20m profits a quarter in 2018.

Sembcorp Industries may be able to see even brighter days with the recovery of its power business in India, according to DBS Equity Research analyst Pei Hwa Ho.

“We believe in the long-term growth prospects of SCI’s Energy arm, which has expanded its global footprint into key emerging markets – India, Bangladesh, Vietnam and Myanmar,” Ho noted.

The analyst noted that the firm’s India operations swung from a loss of $58m in 2017 to a profit of $47m in 2018, and that the positive trend should continue.

“The power market in India is recovering with current peak surplus expected to reverse by FY20 according to independent research house CRISIL, driving up tariffs. India remains a key growth driver, accounting for 15-20% of earnings,” Ho explained.

Also read: Sembcorp Industries' profits jumped 21% to $93m in Q1

In this setting, Ho thinks that Sembcorp’s India operations will return to the black in the following quarters and churn around $70m profits for the full year, up from $47m in 2018. She explained that this could be fueled by the peak renewable generation, which generated $15-20m profit a quarter during the same periods last year, and the full impact of resumption of SEIL Project 1 Unit 1, which would be seen in Q2.

Moreover, the analyst also noted that the second long-term PPA for SEIL Project 2 to supply 500MW of power to Andhra Pradesh for eight years is expected to commence in H2 2019. “Whilst the higher spread in Q1 might not sustain, we expect the plant to almost break even with the long-term PPAs and overall improving market supply/demand dynamics,” Ho said.

The report also noted that Sembcorp’s retail business in Singapore is doing relatively well, although the power market remains competitive. “On carbon tax, we estimated that the implementation could result in an additional $15-20m in costs, of which a big chunk should be passed on to customers,” the analyst said.

Sembcorp Industries saw its profits climb 21% YoY to $93m in Q1 from $77m in the same period a year ago, thanks to the improved performance from its energy business.