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Adani Enterprises' Q2FY19 results (Underperformer) - Strong performance in the MDO business

Q2FY19 result highlights

• Adani Enterprises’ (ADE) reported earnings were above our estimate due to lower than expected depreciation and tax expenses. PAT grew 191.8%yoy to Rs1.7bn and was above our estimate of Rs1.3bn.
• Revenue grew 7.1%yoy to Rs91.5bn (est: Rs83.6bn) led by strong growth in MDO volumes. EBITDA grew 5.5%yoy to Rs4.4bn and was below our estimate of Rs4.8bn because CGD business financials have been accounted directly in earnings as profit from discontinued operations. EBITDA margin contracted 10bp yoy to 4.8% and was below our estimate of 4.8%. Coal trading EBITDA grew 66.2% yoy (down 33% qoq) to Rs136/MT ($1.9/MT) and coal MDO EBITDA grew 4.9%yoy to Rs703/MT ($10/MT). 
• Other income grew 42.4%yoy to Rs1.1bn (est: Rs1.2bn), interest cost grew 17.2%yoy to Rs4bn (est: Rs4bn) & deprecation fell 35.8%yoy to Rs1.6bn as against estimate of Rs1.9bn. The consolidated gross debt declined to Rs156bn as on Sept 2018 from Rs167bn as on June 2018 partly due to demerger of CGD business (which had debt of Rs3.5bn).
• Coal MDO volumes grew at robust pace of 82.4%yoy at 3.1MT (est: 2.2MT) due to higher coal dispatch. Coal trading volumes: decline of 15.4%yoy to 14.8MT due to high base. However, it was above our estimate of 11.5MT.
• Solar manufacturing business posted EBITDA loss for 2^nd consecutive quarter at Rs350m due to higher priced inventory of wafers even as end product prices were lower due to increased competition. Adani Wilmar also posted EBITDA loss at Rs100m due to higher material costs due to increased customs duty & currency depreciation.

Key positives:  Improvement in MDO and coal trading volumes

Key negatives: Lower EBITDA margins in coal trading business and losses in Mundra Solar and Adani Wilmar  

Impact on financials: Downgrade in FY19E/FY20E earnings estimates by 25.8%/12.6% partly due to demerger of CGD business and partly on account of losses in the Solar manufacturing business.

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 losses in solar manufacturing business and agri business  has impacted profitability adversely. Also, the stock trades at 24.5x/15.3x FY19E/FY20E earnings which seems to be expensive and restricts further upside from here. As a result, we maintain our Underperformer recommendation on the stock with revised SOTP based PT of Rs136.