Sembcorp Industries hit by startup losses in India

The firm is estimated to have incurred SGD20m of losses.

Sembcorp Industries (SCI)'s first thermal power plant in India, the 1,320-megawatt coal-fired TPCIL may finally start to deliver, but improvements could be partly wiped out by start-up losses in Sembcorp Gayatri Power, said MayBank KimEng.

According to the research firm, after several quarters of disappointment, market expectations for India have been toned down to more realistic levels.

"Consensus has cut its FY16-18 EPS forecasts by 7-11% since May 2016," it noted.

Respective plant load factors for TPCIL in 1Q16 and 2Q16 were 83% and 69%.

Management said those brought about a marginal profit in 1Q16 and near breakeven levels in 2Q16. It guides for a stronger 2H16 and overall net profitability for TPCIL in FY16.

2Q16’s lower load factor was due to the shut-down of Unit 2 for technical reasons. Management said these have largely been resolved and load factors have recovered close to 80% after 2Q16. Data from India’s Central Electricity Authority confirm that TPCIL operated at above 80% in the last two months.

Additionally, TPCIL now has 86% of capacity under long-term PPAs with tariffs of INR3.70/kWh and INR4.15/kWh. These follow another 570MW PPA with Telangana Power Distribution Companies for eight years starting Apr 2016.

Barring unforeseen shutdowns, MayBank KimEng sees a stronger 3Q16 QoQ and net profitability for FY16. The research firm however cautioned that SGPL may continue to be a major drag.

The two units of this 660MW power plant adjacent to TPCIL are expected to achieve COD in 3Q16 and 4Q16.

"Worryingly, SGPL has yet to strike any long-term PPA," said MayBank KimEng.

SGPL is bidding for a 500MW long-term PPA with Andhra Pradesh but due to delays in contract bidding, any successful PPA may only commence in Jan 2018.

According to MayBank KimEng, SGPL would have to depend on a short-term PPA with Telangana for 300MW and another 1-year contract for 88MW. Both will expire in May 2017.

Management said that short-term PPA tariffs are at higher than spot prices still not profitable and could most likely only cover interest payments.

Spot power prices have been drifting down in India, from INR4.35/kWh at the beginning of 2014 to INR2.40/kWh. Compare this with TPCIL’s long-term PPAs of INR3.70/kWh and INR4.15/kWh.

"We believe that SGPL could incur start-up losses in 3Q16 and 4Q16, offsetting part of the profitability from TPCIL. We estimate that in TPCIL’s first four quarters of operations, SCI booked SGD20m of losses from this subsidiary," said MayBank KimEng.