India Ratings Assigns Sembcorp Energy India’s CP ‘IND A1+’; Affirms Existing Facilities

India Ratings and Research (Ind-Ra) has taken the following rating actions on Sembcorp Energy India Limited’s (SEIL) debt instruments:

Analytical Approach: The ratings are underpinned by SEIL’s strong linkages with the sponsor as reflected by the guarantees provided to the lenders for a certain percentage of the loans. Given the support extended in the past and strategic importance of the thermal assets to SCU, the agency expects SCU to support both the projects, should a need arise. 

The ratings continue to reflect SEIL’s operational performance being in line with Ind-Ra’s estimates for FY20, adequate debt service coverage ratio (DSCR), an intact debt service reserve account and presence of long-term and medium-term coal linkages.

KEY RATING DRIVERS

CP backed by Liquidity: SEIL has indicated that  the total outstanding of all tranches of CP including accrued interest at no time will exceed the unutilised drawing limit from the working capital facility and proceeds of the same will be used for working capital purposes.

Strong Financial Performance: SEIL continues to performs in line with Ind-Ra estimates. In FY20, the projects’ total revenue was INR74.64 billion (FY19: INR75.59 billion) with EBIDTA margin was stable 31% (29%).

Liquidity Indicator – Adequate: As on 31 October 2020, SEIL had total cash (excluding debt service reserve) of INR9,060 million, of which INR3,450 million was free cash available. The availability of a debt service reserve for one quarter (project 1) and two quarters (project 2) of debt servicing is also a positive for the project.

Recovery under change in Law:  CERC had allowed compensation to SEIL under various change in law heads such as increase in clean energy cess, development surcharge and busy season surcharge on railway freight, and coal related statutory payments in the long-term power purchase agreement (PPA) for 500MW. This compensation will increase the revenue realisation marginally and is a positive for credit quality. SEIL, based on the Central Electricity Regulatory Commission (CERC) order, recognised an amount which shall be payable by Andhra Pradesh and Telangana distribution companies.

FGD Status: CERC had provisionally allowed for capex requirements towards flue gas desulfurization (FGD)installation and soft costs as per actuals. However, the final cost is subjected to bidding. Although CERC has recognised FGD installation under change in law, the compensation granted by commission would be applicable only to the contracted capacity, while the FGD system will be required to be installed for the nameplate capacity.

The cost of recovery of capex shall be spread over the useful life of the plant (or) FGD system. The counterparties shall be liable to pay compensation only for the remaining term of the PPA. Hence, presence of a long-term PPA for 100% of the capacity will be critical for complete recovery of compensation. Ind-Ra will continue to monitor the pass-through mechanism to be approved for capex requirements towards FGD installation.

Moderate Operational Performance in 1HFY21: Project 1 has historically maintained a plant availability factor of above 90% (barring FY19), higher than the normative level of 85%. However, in 1HFY21, project 1 underwent capital overhauling for 45 days, due to which the plant availability factor declined to 75%. Project 2 has historically maintained availability higher than 88%. The plant load factor of project 1 in 1HFY21 declined to 68% (FY20: 88.8% FY19:72.5%) due to the overhauling process. Project 2 has demonstrated reasonably healthy plant load factor of 75%, despite fall in energy demand due to the COVID-19-led lockdown in 1HFY21 (FY20: 72.5%, FY19: 84.2%). 

For the detailed rationale, click here

RATING SENSITIVITIES

Negative: SEIL’s plant performance (project 1 and project 2) falling significantly below the base case estimates, an increase in receivables period beyond 180 days, absent sponsor support or any weakening of linkages with the sponsor will be negative for the ratings. 

COMPANY PROFILE

SEIL (project 1) built a 1,320MW (2 x 660MW) super critical thermal power project in Painampuram, AP. Unit 1 and Unit 2 were commissioned on 11 April 2015 and 15 September 2015, respectively. The project 2 had implemented a 1,320MW (2 x 660MW) coal-fired thermal power plant near the port city of Krishnapatnam, Andhra Pradesh. Unit 1 and Unit 2 were commissioned on 17 November 2016 and 21 February 2017, respectively.
Project 1 has 86% of its capacity tied through long-term and medium-term PPAs with Andhra Pradesh and Telangana distribution companies. Project 2 has 20% of its capacity tied-up with Bangladesh Power Development Board until August 2033.
FINANCIAL SUMMARY

RATING HISTORY

COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at http://www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.