| Sembcorp Energy India Limited | ||||
| Long term rating continues on 'Watch Developing'; rated amount enhanced for CP | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings’ rating on the long-term bank facility of Sembcorp Energy India Limited (SEIL) continues to be on ‘Rating Watch with Developing Implications’ and the rating of commercial paper is reaffirmed at ‘CRISIL A1+’.
SEIL is undertaking refinancing of its debt with parent guarantee-backed debt. Of the total long-term debt of around Rs 6,620 crore as on September 30, 2022, around Rs 4,000 crore has already been refinanced. Refinancing of the remaining amount is underway. With incremental borrowing through CP, no increase is expected in the overall external borrowings level. Furthermore, liquidity remains strong given the ample cash, healthy cash accrual and large unutilised bank lines.
In September 2022, the ratings had been placed on watch following the announcement of sale of 100% stake in SEIL by the Sembcorp group to Tanweer Infrastructure (TI) for a consideration of around Rs 11,700 crore, which would be paid to the Sembcorp group as deferred payment over 15-24 years.
The Sembcorp group will render technical, financial, environmental, regulatory and legal advisory services to SEIL through a technical services agreement (TSA) to be signed by Sembcorp India Pvt Ltd. As a result of the TSA, the current employees will continue to handle day-to-day project management even after change of ownership. While the group is not expected to have any ownership after the transaction, it would continue to have majority of the economic interest in SEIL. Corporate guarantees given by Sembcorp Utilities (SCU) to loans of SEIL are expected to continue after the shareholding change. Furthermore, SCU is expected to provide corporate guarantees to future lenders of SEIL, who will refinance the debt. SCU would also have a charge on the shareholding of TI until the deferred payment is complete.
TI is owned by a consortium led by Oman Investment Corporation S.A.O.C. (OIC, holds 70%) in partnership with the Ministry of Defence Pension Fund, Oman (20%), and Dar Investment SPC (10%). OIC is a leading Omani private equity investment company with a strong track record of investments in energy and infrastructure projects, real estate, logistics, healthcare as well as asset and project management services. It is also a long-term partner of the Sembcorp group, having worked with them for 12 years on a power and water plant in Oman.
The rationale for the stake sale is to de-carbonise the group balance sheet and accelerate the movement from ‘brown to green’. While the move will lead to de-consolidation of SEIL from the balance sheet of SCU, the Sembcorp group is expected to continue to fully back SEIL both operationally and financially, at least until the deferred payment is complete.
CRISIL Ratings is closely engaging with the group management and will continue to monitor the developments. It will resolve the watch and take appropriate rating action once more clarity is received on the contours of the stake sale.
The rating continues to reflect strong revenue visibility because of long-term power purchase agreements (PPAs), healthy track record of power generation and plant availability, comfortable financial risk profile and support from the ultimate parent, Sembcorp Industries (SCI). These strengths are partially offset by exposure to weak counterparties.
SEIL has two operational thermal projects—P1 and P2—of 1,320[1] megawatt (MW) each. In fiscal 2022, the company signed three new PPAs aggregating 925 MW, which increased the total tied-up capacity to ~90% of the net available capacity as on March 31, 2022, from 53% as on March 31, 2021. Of the newly signed PPAs, 300 MW is already operational, while 625 MW is pending to operationalise as the requisite transmission line is under implementation.
SEIL has fuel supply agreements with Coal India Ltd (CIL; 'CRISIL AAA/Stable/CRISIL A1+') for 4.2 million tonne per annum (MTPA) in each of its projects. It also has an agreement with PT Bayan Resources of Indonesia for ~1.5 MTPA of coal at a fixed price contract and 1 MTPA at an indexed price contract.
In December 2021, the Sembcorp group undertook restructuring of the Indian entities such that the thermal and renewables businesses are now individually held as stepdown subsidiaries of SCI. The move was to enable better and focused management of both the businesses as separate units. As part of this restructuring, SEIL repaid ~Rs 5,200 crore of promoter liabilities (debt and accrued interest) without utilising project cash flow, thereby considerably improving the financial risk profile.
The rating also factors in any need-based support from the parent, SCI. The parent has, in the past, provided financial support to SEIL while also extending corporate guarantees for some of the debt raised in India. The Indian thermal plants are the largest contributor to the conventional energy business of the group and, hence, are strategically important. SCI is likely to continue to extend need-based support to SEIL over the medium term. [1] Net available capacity of around 1,250 MW each |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of SEIL to arrive at the rating. Until the announcement of the stake sale transaction, CRISIL Ratings had applied its parent notch-up framework to factor in the support available to SEIL from the ultimate parent, SCI.
However, after the announcement, CRISIL Ratings is engaging with the management to re-assess the linkages of SEIL with SCI. The Sembcorp group is expected to continue to extend technical, financial and operational support to SEIL even after the transaction is completed. |
Key Rating Drivers & Detailed Description Strengths:
Total tied-up capacity of SEIL increased to ~90% of the net available capacity in fiscal 2022 from 53% in fiscal 2021 with the signing of three new long-term PPAs: 300 MW with PTC India Ltd (‘CRISIL A1+’), 625 MW with southern, eastern and central distribution companies (discoms) of Andhra Pradesh (AP) and 100-MW medium-term PPA with Gujarat Urja Vikas Nigam Ltd (GUVNL). These PPAs, except that with GUVNL, have been won at competitively bid tariffs and the company has partial long-term fuel linkages to back them.
The 625-MW PPA signed with AP discoms is yet to commence as the transmission line is under implementation. However, the company already has a long-term fuel supply agreement signed for this PPA. This capacity, along with the 10% net available capacity not tied up in long-term PPAs, is currently being sold at merchant rates.
The tariff structure of the PPAs allows the company to recover its entire fixed cost provided the plant availability factor (PAF) exceeds normative availability of 85%. PAF continues to be above normative requirement at 90% in fiscal 2022 (91% in the previous fiscal). It is expected to remain higher than normative, driven by adequate fuel supply and healthy coal stock available at the plants. Nonetheless, coal availability and its impact on plant availability will remain key monitorables.
Furthermore, the company has demonstrated a healthy track record of generation despite 15% installed capacity not having long-term PPAs. For P1, plant load factor (PLF) improved to 81% in fiscal 2022 from 78% in the previous fiscal, driven by higher demand. For P2, PLF dipped to 66% in fiscal 2022 from 80% the previous fiscal because of scheduled maintenance activity at the plant.
Operating efficiency is driven by well-planned logistics for supply of coal from the mine to the plant. This ensures adequate coal supply, lowers the transportation cost and minimises transit losses. Consequently, the variable cost of generation is low, which ensures favourable offtake through the respective PPAs. SEIL has also been able to demonstrate robust volume in the merchant market in fiscals 2021 and 2022 on account of high demand and increased tariff. Ability to sustain volume on a short term at healthy profitability will be closely monitored.
The 570-MW PPA with the Telangana discom is due to expire in fiscal 2024 and, hence, is subject to renewal risk. Ability to renew the PPAs at favourable terms and tie up PPAs for the remaining capacity would be key monitorables.
After the restructuring, the debt-to-earnings before interest, taxes, depreciation and amortisation ratio improved to 3.8 times as on March 31, 2022, from 4.5 times as on March 31, 2021, while gearing improved to 0.8 time from 1.2 times. The long debt tenure and strong operating metrics should result in a healthy debt service coverage ratio, comfortably sustaining above 1.5 times on average. SEIL plans to incur capital expenditure (capex) of Rs 2,000 crore for implementing a flue gas desulfurisation (FGD) project, which would be partially funded through debt (yet to be tied up). Liquidity is strong, with a debt service reserve account for one quarter of the ensuing debt obligation for the debt in P1 and two quarters for that in P2. Bank limit of around Rs 3,000 crore further shores up liquidity.
SCI has supported its assets globally during adverse situations. It has infused funds in SEIL on multiple occasions and has extended guarantees for some of the debt raised in India. In fiscal 2022, SEIL repaid ~Rs 5,200 crore of promoter liabilities (debt and accrued interest) without utilising project cash flow, leading to considerable improvement in the financial risk profile. The company, being the primary contributor to the conventional energy business of the group, is critical to the business of SCI and shall continue to benefit from the managerial and need-based financial support of the parent. The impact of the stake sale by the Sembcorp group on the credit risk profile of SEIL will be a key rating sensitivity factor.
Weaknesses:
The counterparties of SEIL have weak credit risk profiles. Receivables were high at 175 days as on March 31, 2022 (despite around 40% of the total capacity being sold at merchant rates with low receivables) because of delay in payments from counterparties, in particular the Telangana discom. Of Rs 3,698 crore of receivables outstanding as on March 31, 2022, 78% were from the Telangana discom, while 13% were from the AP discoms. With the signing of the new PPA with AP discoms, exposure to weak counterparties is likely to increase. With the new late payment surcharge rules for discoms released in June 2022, the collection efficiency for SEIL has improved and liquidation of past receivables from AP and Telangana discoms has also begun.
While presence of a revolving letter of credit from all the counterparties as well as healthy liquidity maintained by the company provide comfort, any further build-up of receivables and delayed collections from counterparties resulting in weakening of the credit risk profile will remain key monitorables.
With 10% of the net available capacity not tied up in long-term PPAs and the 625-MW PPA yet to operationalise, a sizeable portion of the capacity of SEIL is dependent on bilateral or power exchange trade and is vulnerable to fluctuations in merchant prices.
Furthermore, the 570-MW PPA with the Telangana discom is due to expire in fiscal 2024 and, hence, is subject to renewal risk. The expiry of the PPA would further increase the capacity being sold at merchant prices. Because of inherent variability in merchant prices, this may expose the company to a quantum of the power sold at a rate exceeding the variable cost of generation or significantly reduce its PLFs. Strong power demand forecast over the medium term and prevailing high merchant tariffs support the likelihood of the renewal of the PPA; this will remain a monitorable. However, ability to maintain healthy operating margin over the medium term will remain a rating sensitivity factor. |
Liquidity: Strong Cash and equivalents stood at around Rs 1,100 crore as on October 31, 2022. Expected annual cash accrual of Rs 1,500-1,800 crore should adequately cover yearly debt obligation over the medium term as well as the equity requirement of upcoming FGD capex. Utilisation of the fund-based working capital limit of around Rs 3,000 crore averaged 32% over the 12 months through September 2022; the unutilised bank limit should be adequate to meet any incremental working capital requirement. However, sustenance of liquidity would be closely monitored. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company SEIL, incorporated in 2008, is a wholly owned stepdown subsidiary of SCI. The company has two projects, P1 and P2. P1 involves a 1,320-MW (2X660 MW) super-critical thermal power project in Painampuram, AP. Unit 1 and Unit 2 were commissioned on April 11, 2015, and September 15, 2015, respectively. P2 involves a 1,320-MW (2X660 MW) coal-fired thermal power plant near the port city of Krishnapatnam, AP. Unit 1 and Unit 2 were commissioned on November 17, 2016, and February 21, 2017, respectively. |
About SCI SCI, 49.5% owned by Temasek Holdings Pvt Ltd (rated ‘AAA/Stable/A-1+’ by S&P Global Ratings), is a leading energy, water and urban development group operating across five continents. It has around 6 gigawatt (GW) of renewable energy capacity, 9 GW of conventional energy capacity and close to 9 million cubic metres of water treatment per day in operation and under development. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||
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This Annexure has been updated on 22-Dec-22 in line with the lender-wise facility details as on 26-Jul-22 received from the rated entity.
Criteria Details
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