Detailed Rationale CRISIL Ratings has assigned ‘CRISIL AA+/Stable/CRISIL A1+’ ratings to the bank facilities of Sembcorp Energy India Ltd (SEIL) amounting to Rs.8100 crore. The rating on the commercial paper (CP) has been reaffirmed at ‘CRISIL A1+’. The rating on Rs.1215 crore bank loan facilities has been upgraded, removed from ‘Rating Watch with Developing Implication’ and also withdrawn on the company’s request and on receipt of a No-Dues certificate form the lender. The withdrawal is in line with CRISIL Ratings’ withdrawal policy.
The assigned ratings reflect the improvement in SEIL’s business risk profile with the operationalization of 625-MW PPA with Andhra Pradesh in 2023, leading to 85% of SEIL’s net capacity being tied up in long term PPAs. Further, the reduction in term debt over the last 2 years from Rs 11,509 crore as on March 31, 2021 to Rs 5,851 crore (including commercial paper of Rs. 2,000 crore taken as bridge finance) as on Dec 31, 2022, as well as refinancing of existing debt with lower-priced guarantee-backed debt has led to an improved average debt service coverage ratio over the life of debt. 90% of the total debt as on December 31, 2022 is backed by guarantees from Sembcorp Utilities (SCU; part of the Sembcorp group[1]). The business risk profile is further supported by healthy tie-up of domestic and imported coal for coal requirements in long-term contracts, reduction in receivable days in fiscal 2023 as well as maintenance of healthy plant availability. Furthermore, liquidity remains strong given the ample cash, healthy cash accrual and large unutilised bank lines.
The ratings also reflects the improvement in credit profile of SCI, supported by profit-accretive acquisitions in the renewable energy sector and healthy returns generated in the conventional energy sector.
The resolution of rating watch follows the completion of transfer of 100% stake in SEIL by the Sembcorp group to Tanweer Infrastructure (TI) for a consideration of around Rs 11,734 crore, plus interest thereon which would be paid to the Sembcorp group as deferred payment over 15-24 years.
While the group does not have any ownership after the transaction, it continues to have majority of the economic interest in SEIL. CRISIL continues to factor in the support from the Sembcorp group given Sembcorp group is expected to continue to fully back SEIL both operationally and financially, at least until the deferred payment is complete.
Sembcorp group will render technical, financial, environmental, regulatory and legal advisory services to SEIL through a technical services agreement (TSA) signed by Sembcorp India Pvt Ltd. As a result of the TSA, the current employees continue to handle day-to-day project management even after change of ownership. The financial support comes from the guaranteed SEIL’s debt by Sembcorp Utilities (SCU; part of the Sembcorp group) despite the shareholding change. CRISIL Ratings expects SCU to continue to provide corporate guarantees for any future debt refinancing in SEIL. 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 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 SCI. These strengths are partially offset by exposure to weak counterparties.
[1]Sembcorp Industries Pte Ltd (SCI) and its wholly owned subsidiaries. |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of SEIL to arrive at the rating. Despite the change in ownership, CRISIL Ratings continues to apply its parent notch-up framework to factor in the support available to SEIL from SCI. This is because SCI is expected to continue to extend technical and operational support to SEIL along with the moral obligation to support financially given the extended corporate guarantees. |
Key Rating Drivers & Detailed Description Strengths: Healthy revenue visibility and established operating track record Total tied-up capacity of SEIL on long term basis increased to ~85% of the net available capacity in fiscal 2022 from 53% in fiscal 2021 with the signing of two new long-term PPAs: 200 MW with PTC India Ltd (‘CRISIL A1+’), 625 MW with southern, eastern and central distribution companies (discoms) of Andhra Pradesh (AP). The PPAs have been won at competitively bid tariffs and the company has long-term fuel linkages to back them.
Of the remaining capacity, a 100-MW medium-term PPA with Gujarat Urja Vikas Nigam Ltd (GUVNL) has been signed, which will expire in fiscal 2023. The rest is being sold at merchant rates. The tariff structure of the long-term PPAs allows the company to recover its entire fixed cost provided the plant availability factor (PAF) exceeds normative availability of 85-90%. PAF continues to be healthy at ~90% in the 9 months ended December 31, 2022 (90% in fiscal 2022 and 91% in fiscal 2021). 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) has been healthy at around 83% for the last 3 fiscals, driven by healthy power demand. For P2, PLF has averaged around 73% because of scheduled maintenance activity and low PPA tie-ups at the plant.
Long-term domestic coal linkages enable the plants to maintain low variable cost, which helps in keeping SEIL higher on the merit order. However, recent increases in price of imported coal led to increased blended coal prices as SEIL uses a mix of domestic and imported coal in its PPA. Further, increase in imported coal cost is not completely pass-through in the AP discom PPA in Project 1, leading to partial under-recovery. However, given the healthy power demand, SEIL has been able to maintain healthy PLFs. Moreover, SEIL has an international coal linkage of 2.5 MTPA, of which ~1 MTPA is index-linked and remaining on fixed price contract, thus limited the impact of price increases. 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 PPA at favourable terms and tie up PPAs for the remaining capacity would be key monitorables.
Healthy financial risk profile 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, on average over the PPA tenure. 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). While the debt service reserve account requirement has been released with the debt being backed by parent-guarantee, liquidity remains strong with , bank lines of around Rs 3,000 crore.
Strong managerial and financial support from the Sembcorp group Despite the transfer of ownership, the Sembcorp group will continue to provide financial, operational and managerial support to SEIL. SCI has supported its assets globally during adverse situations. It has infused funds in SEIL on multiple occasions and has extended guarantees for most 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.
Weaknesses: Exposure to weak counterparties The counterparties of SEIL have weak credit risk profiles. Receivables were high 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, leading to a fall in receivable period to around 149 days as on December 31, 2022 from 180 in March 31, 2022.
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.
Exposure to merchant prices and renewal risk The 15% of the net available capacity not tied up in long-term PPAs 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 567 crore as on February 28, 2023. 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 43% over the 9 months through December 2022; the unutilised bank limit should be adequate to meet any incremental working capital requirement. However, sustenance of liquidity would be closely monitored. |
Outlook: Stable SEIL’s business risk profile should remain strong over the medium term with steady cash flows from long-term PPAs and sustenance of operational performance, while financial risk profile should remain strong. |
Rating Sensitivity Factors Upward factors
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About the Company SEIL, incorporated in 2008, was s a wholly owned stepdown subsidiary of SCI. SCI sold SEIL to Tanweer Infrastructure SAOC on January 19, 2023. Now SEIL is a wholly owned step-down subsidiary of Tanweer Infrastructure SAOC. 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.
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 8925 MW, which increased the total tied-up capacity to ~85% of the net available capacity as on March 31, 2022, from 53% as on March 31, 2021.
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. |
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. |
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Any other information: Not applicable |
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Annexure - Details of Instrument(s)
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Criteria Details
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