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Adani Enterprises' Q4FY18 results (Outperformer) - New businesses driving growth

Q4FY18 result highlights

• Adani Enterprises’ (ADE) reported earnings were below our estimate due to write-off of a claim of Rs1.8bn which was recognized as income in FY17. ADE had recognized the claim from RRVUNL in its MDO business subsequent to a favourable arbitration award but has reversed it now following an unfavourable High Court order. ADE meanwhile has appealed against this ruling in the Supreme Court. PAT declined 14.8%yoy to Rs1.9bn vis-à-vis estimate of Rs2.6bn.
• Revenue declined 13.5%yoy to Rs102bn led by decline in coal trading volume/revenue. EBITDA was flat yoy at Rs6.6bn and EBITDA margins grew 90bps yoy to 6.4% led by higher coal trading margins at 6% as against 5% in Q4FY17. Coal trading EBITDA stood at Rs288/MT ($4.5/MT) up from Rs223/MT ($3.4/MT) in Q3FY18. 
• Other income jumped 113%yoy to Rs3bn due to interest income of Rs970m on delayed payments in power trading and interest earned on trade advances given to Adani Power. The consolidated gross debt increased to Rs273bn as on Mar-18 from Rs248bn as on Dec-17 due to increase in renewable business debt.
• Volumes and guidance: Coal trading: decline of 25%yoy to 16.1mt due to lower coal offtake by Adani Power’s Mundra plant; MDO (domestic) dispatch: down 12%yoy at 1.94mt due to evacuation constraints at the mine; CGD: +18%yoy at 129MMSCM. With the completion of a 77km rail line at Parsa Kente ADE has guided for a sharp uptick in MDO volume in FY19 to 14mt (7mt in FY18) and to 28-30mt in FY20 due to increased production in Parse-Kente block and start of production from the Gare Palma (III) and Talabira II and III coal blocks. ADE has guided for a 60-65mt volume in coal trading in FY19 (66mt in FY18) as volume will remain impacted by lower off take by Adani Power. 
• The listing of the de-merged Adani Green Energy shares is likely to be completed within May 2018. The application for de-merger of Adani Gas was made in April 2018 and listing is likely by October 2018.

Key positives: Improvement in coal trading margins.

Key negatives: Lower than estimated trading and MDO volumes

Impact on financials: Downgrade in FY19E/FY20E earnings by 8.1%/16.8% due to lower volumes in coal trading 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. With ADE now de-merging and listing its renewable power generation and CGD businesses, we expect value unlocking in these businesses. Maintain Outperformer with a SoTP based target price of Rs193 (change in target price not comparable due to demerger of Adani Green Energy business and hence, we have removed its value from our valuation).