Daiwa downgraded Sembcorp Industries to Outperform from Buy, pointing to the stock’s around 20 percent rise over the past two months.
“The market will take any disappointment in its India operations as a reason to sell the stock,” Daiwa said in the note on Monday.
While the investment bank said it expected the India business was on track for an operational turnaround this year, it also projected the strong international coal prices in 2018 — up an average of around 10 percent quarter-on-quarter in the third quarter — would put a cap on earnings in India.
On the upside, Daiwa pointed to “robust” spot electricity tariffs in India in September, offsetting weakness in July to August.
“We see sustained strength in India’s spot tariffs as a major positive for SCI,” it said.
But it projected the upside would be offset at least partially by the rupee’s around 6 percent depreciation against the U.S. dollar in the third quarter as international coal is sourced in dollars.
It also said it expected Sembcorp’s ability to garner more long-term power-purchase agreements for its SGPL plant, which will help reduce the asset’s earning variability, would be viewed positively by the market. SGPL is Sembcorp Gayatri Power, which has a coal-fired thermal power plant in Andhra Pradesh.
In August, SGPL won a contract to supply Bangladesh Power Development Board with 250MW of power for 15 years.
Daiwa noted that Sembcorp disclosed it could face another S$75 million in provisions, on top of S$25.4 million existing provisions, due to an alleged discharge of off-specification wastewater at an overseas wastewater joint venture.
“We view this as a one-off charge; if incurred, we do not expect it to impact SCI’s normalised profitability,” Daiwa said. “However, we believe this brings to attention the heightened risk nature of SCI’s growing utilities assets in emerging countries.”
Daiwa kept its target price on Sembcorp Industries unchanged at S$3.37.
The stock was down 0.33 percent at S$3.06 at 10:24 A.M. SGT.