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Adani Enterprises' Q3FY19 results (Underperformer) - ICM margins contract significantly

Q3FY19 result highlights

• Adani Enterprises' (ADE) earnings were below our estimate despite lower depreciation expenses, due to ICM (Integrated Coal Management) margins and higher interest costs expenses. PAT fell significantly by 80.6% yoy to Rs447m, below our estimate of Rs1.2bn.
• Revenue grew 7.2%yoy to Rs104.3bn (est: Rs96.4bn) led by strong growth in MDO volumes and higher ICM volumes. EBITDA declined 38.7%yoy to Rs4.4bn and was below our estimate of Rs5.2bn due to lower ICM margins (impacted by fx losses). EBITDA margin contracted 320bp yoy to 4.2% and was below our estimate of 5.2%. 
• ADE reported a net reversal of Rs344m in depreciation charges of Rs344m as it has revised the accounting policy for solar business from WDV to SLM and increased useful life of the assets from 10 years to 15 years with effect from April 1, 2018. Consequently, there is a reversal of Rs1.3bn in depreciation during Q3FY19.
• Other income grew 31.5%yoy to Rs1.2bn (est: Rs1.5bn), interest cost grew 52.1%yoy to Rs4.9bn (est: Rs4bn) primarily due to ~100bp rise in interest rate in the ICM business. The consolidated gross debt declined to Rs146bn as on Dec 2018 from Rs156bn as on Sept 2018.
• Coal MDO volumes grew at robust pace of 82.9%yoy at 3.2mt (est: 2.2mt) due to higher coal dispatch. ICM volumes remained flat yoy at 16.1mt due to high base (estimate: 14.6mt).
• Solar business posted EBITDA of Rs250m after 2 consecutive quarters of losses. It fell 65.7% yoy due to competitive pricing in the market even as ADE had to consume its higher priced inventory of wafers.

Key positives:  Improvement in MDO and ICM volumes

Key negatives: Lower EBITDA margins in ICM business, lower margins in solar PV business

Impact on financials: Downgrade in FY19E/FY20E earnings estimates by 27.5%/15.4% mainly on account of lower ICM margins, high interest cost and lower volumes/ profitability in solar manufacturing business.

Valuations & view

ADE offers a unique combination of coal mining and coal logistics 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 offers limited upside to our revised SOTP based PT of Rs124. As a result, we maintain our  Underperformer on the stock.