625MW contract to turn SEIL 2 profitable

■ SEIL has secured a 12-year PPA to supply 625MW of power to Andhra Pradesh; with this contract, 77% of SEIL will be contracted (previously 50%).
■ No tariff was disclosed but we believe it should be close to market rate. IEX spot prices in Nov-Dec 21 averaged 3.33 Rs/kWh.
■ The contract will begin in 2023 and could turn SEIL plant 2 profitable after being loss-making since 2016. Reiterate Add and TP of S$2.51.

SEIL secures a long-term PPA to supply 625MW of power

● SCI’s subsidiary, SEIL, has signed a long-term power purchase agreement (PPA) to supply 625MW of power to Andhra Pradesh state power distribution companies for 12 years. The contract is expected to commence by FY23F.
● The power supply will be generated from SEIL’s 2.6GW supercritical power generation facility in Nellore, India. SEIL has two projects in India, i.e. SEIL 1 and SEIL 2, which have gross installed capacities of 1.32GW each.
● With this agreement, long-term and mid-term PPAs w ill make up 77% of SEIL’s thermal plant capacity. Previously, only 50% was contracted.
● Based on SCI’s 1H21 data, SEIL 1 has contracted capacities of 570MW to Telangana DISCOMS and 500MW to Telangana and Andhra Pradesh DISCOMS. SEIL 2 has contracted capacity of 250MW to Bangladesh Power Development Board.

Competitive tariff rates close to 3.33 Rs/kWh

● According to IEX, yearly average power prices trended considerably higher in 2021 at 3.95 Rs/kWh compared to FY19 and FY20 of 3.18 Rs/kWh and 2.62 Rs/kWh, respectively (Fig 1). In Nov and Dec 21, the tariff averaged around 3.33 Rs/kWh after a temporary peak of 8.01 Rs/kWh in Oct 21.
● We think the increase in power prices in 2021 was partly a function of higher input cost but more so due to greater overall demand for power. Hence, while tariffs were not disclosed, we think SCI secured this contract at a competitive market rate close to 3.33 Rs/kWh.

Expect SEIL 2 to be profitable in FY2023F

● SEIL 2 has historically recorded losses since FY16, w ith FY20 registering S$52m in losses. We believe this contract will turn SEIL 2 to profitability from FY23 onwards.

Contract positive for SCI and its share price

● We see this development as positive for its share price.
● We retain our Add call and TP of S$2.51, based on 15x CY22F P/E (Asian peers’ average).
● Re-rating catalysts for SCI: decarbonisation of conventional energy assets. Downside risks: higher net gearing and further impairments from conventional energy segment.