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Adani Enterprises' Q1FY19 results (Downgrade to Underperformer) - Lower trading volumes

Q1FY19 result highlights

• Adani Enterprises’ (ADE) reported earnings were below estimate due to lower coal trading volumes, steep MTM fx loss of Rs1.7bn, one off expense of Rs900m and higher interest cost. This was partly offset by higher share of profits from associates. Recurring PAT grew 6.3%yoy to Rs1.7bn, was sharply below estimate of Rs2.9bn.
• Revenue declined 9.4%yoy to Rs79.5bn (est: Rs96.5bn) led by decline in coal trading volumes. EBITDA declined 24.5%yoy to Rs4.8bn, was sharply below estimate of Rs8.2bn largely due to MTM fx loss, operating loss of Rs300m form solar manufacturing unit and one off expense of ~Rs900m. EBITDA margin grew 160bp yoy to 6%, was below estimate of 8.5%. Coal trading EBITDA grew 72.3%yoy to Rs203/MT ($3/MT) and coal MDO EBITDA grew 42.6%yoy to Rs749/MT ($11.2/MT). 
• Other income grew 23%yoy to Rs1.1bn (est: Rs950m), interest cost grew 46.1%yoy and 14.8%qoq to Rs4.1bn as against estimate of Rs3.6bn and deprecation grew 86.6%yoy and 6.4%qoq to Rs1.7bn as against estimate of Rs2.1bn. The consolidated gross debt declined to Rs167bn as on June 2018 from Rs273bn as on March 2018 largely due to demerger of renewable energy business (which had debt of Rs92bn).
• Volumes: Coal trading: decline of 28.1%yoy to 11.5MT (est: 17MT) due to lower coal offtake by Adani Power’s Mundra plant as well as higher inventories in the system; Coal MDO (domestic): grew 34.4%yoy at 2.15MT (est: 2.1MT) due to higher coal dispatch; CGD: +14.2%yoy at 126MMSCM (est: 129MMSCM). 
• The application for de-merger of Adani Gas was made in April 2018 and the approval of the scheme from NCLT is likely by August 2018 and listing is likely by October 2018.

Key positives:  Improvement in profits from associates (Adani Wilmar).

Key negatives: Lower than estimated coal trading volumes and weak performance of solar manufacturing business.

Impact on financials: Downgrade in FY19E/FY20E earnings by 14.7%/4.7% due to lower coal trading volumes and steep MTM fx loss.

Valuations & view

ADE offers a unique combination of coal mining and trading businesses. The domestic coal MDO business offers good growth potential with a large number of captive coal mines having been auctioned / allocated. However, the stock trades at 20.7x/15.2x FY19E/FY20E earnings and the current valuation seems to be expensive and restricts further upside from here. As a result, we downgrade our recommendation from Outperformer to Underperformer with a revised price target of Rs178.