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Adani Enterprises' Q3FY18 results (Outperformer) - Unlocking value

Q3FY18 result highlights

• Adani Enterprises’ (ADE) reported earnings were sharply ahead of estimate led by higher coal trading margins, lower interest cost & depreciation. Recurring PAT grew 223%yoy to Rs3.5bn.
• Revenue grew 15.5%yoy to Rs99.4bn (in line). EBITDA grew 70.1%yoy to Rs9.5bn (est: Rs7.5bn) and EBITDA margins grew 300bps yoy to 9.5% led by higher coal trading margins at 4.8% as against 2.1% in Q2FY18 (3.8% in Q3FY17). Coal trading EBITDA stood at Rs223.2/MT ($3.4/MT) up from Rs81.7/MT ($1.3/MT) in Q2FY18. 
• Interest expense grew 31.5%yoy to Rs4.5bn (-4.6%qoq) but below estimate of Rs5.4bn due to net forex MTM gain. Depreciation grew 59.1%yoy to Rs3.4bn (-12%qoq) but below estimate of Rs4.3bn. The company changed the method of depreciation from SLM to WDV wef Q2FY18, which led to higher deprecation in Q2 as it included adjustments for shortfall in deprecation of Q1FY18. The reported depreciation in Q3FY18 stands normalised.
• Other income declined 32%yoy to Rs1bn (est: Rs1.2bn) due to likely lower income on loans and advances to related parties. Share in profit from associates stood at Rs694m (est: Rs600m).
• The consolidated gross debt stood at Rs248bn as on Dec-17 against Rs208bn as on Mar-17.
• Volumes: Coal trading: -1.8%yoy at 16.4mt; MDO (domestic) dispatch: -8.9%yoy at 1.8mt; and CGD: +22.1%yoy at 122MMSCM. The management has guided for a recovery in MDO volumes in Q4FY18.
• The scheme of de-merger of ADE Renewable Energy business and its transfer to Adani Green Energy Ltd has been approved by the shareholders and creditors of the company. The scheme is awaiting approval of the NCLT and other requisite authorities.
• The company has approved the de-merger of its City Gas Distribution business and its transfer to Adani Gas Ltd (AGL).

Key positives: Improvement in coal trading margins.

Key negatives: Lower than estimated MDO and renewable volumes

Impact on financials: Downgrade FY18E earnings by 16.7% due to higher depreciation and lower other income. Upgrade in FY19E earnings by 9% led by higher trading revenues. Introduced FY20E earnings.

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 revised SoTP based target price of Rs240.