Can Indian power plants rescue Sembcorp’s sliding profits?

Its first plant barely broke even in Q1.

Sembcorp has long pinned its growth hopes on its overseas power plants, but the performance of its first fully operational plant in India does not paint a very promising picture for the group’s foreign utilities business.

TPCIL, its first Indian power plant which became fully operational in September last year, missed profit forecasts and only managed to break even in the first quarter due to the weak spot market. The plant also suffered from unexpected repair and maintenance downtime due to a technical fault.

According to a report by Maybank Kim Eng, TPCIL's troubles illustrate the difficulty that Sembcorp faces in emerging markets. TPCIL's unexpected shutdown will lead to lost income in the second quarter, and hence lower revenue contribution from the group's Indian utilities business.

"We are concerned that SCI’s pipeline of greenfield projects in emerging countries (India, Myanmar, Bangladesh & China) may face similar delays and startup issues as India’s TPCIL. These power plant projects require heavy initial capex but may take a few years before payoffs are evident,” Maybank Kim Eng said.

Maybank Kim Eng expects return on equity from utilities to drop to 7-8% over the next two years, compared to current levels of 10-12%.

Despite concerns on the execution of its emerging market projects, DBS believes that overseas power plants remain the way forward for Sembcorp Industries.

The new facilities will add to SCI’s power generation and water treatment capacities, which should increase earnings assuming the operations are profitable, DBS said.

“The power plants in India remain the growth driver in the next two years, mitigating earnings decline from the Singapore power plant, where the operating environment is competitive,” DBS added.