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Adani Transmission's Q2FY18 results (Downgrade to Underperformer) - Results below estimates; Downgrade on expensive valuation

Q2FY18 result highlights

• Adani Transmission reported revenue of Rs7.5bn and EBITDA of Rs4.5bn in Q2FY18 (below estimates of Rs4.9bn). Profit for the quarter was Rs667m, a decline of `33% yoy (below our estimate of Rs1.05bn). Profit was impacted by acquisition related cost and hedging related cost for loans   taken for SPV’s executing transmission assets (INDAs accounting).  
• Revenues for Mundra Mohindergarh are being booked at tariffs approved for Tariff period FY10-FY14.  Under the approved order, interest cost was trued up based on the ECB interest rate of 4.7%. After FY10-FY14, the ECB has been replaced by Indian rupee debt at a rate of ~11%. On full true up of interest cost, we estimate profit will increase by Rs1.2bn/annum. Order is expected in Q3FY18
• Acquisition of Reliance Infra - WRSS assets will be completed by October 31, 2018 while Pārbati Koldam transmission assets is likely to be completed by Q4 FY18
• Adani Transmission is expected to commission all the bids assets six to nine months ahead of schedule. All the projects have achieved financial closure. Against total equity requirement of Rs14bn, Rs9bn has been infused as of end Sep 17.
• Recently, Adani Transmission has entered into exclusive agreement (till 15^th Jan, 2018) with Reliance Infra to buy its Mumbai distribution business. RInfra’s Mumbai distribution, incl. generation, transmission and distribution assets, will be hived off into Reliance Energy.

Key positives: High availability of transmission assets

Key negatives: Delay in Mundra Mohindergarh tariff order for FY15-FY19

Impact on financials: Maintain our earnings estimates as we expect tariff orders for Mundra Mohindergarh in H2FY18; introduce FY20 estimates

Valuations & view

We expect FY17-19E EBITDA and earnings CAGR to be 71% and 93% respectively, led by final tariff orders for existing assets, commissioning of new assets, acquisition of assets and refinancing-led interest cost savings. Given the rich valuations (32x FY19E earnings and 5.5x FY19E book value), we downgrade stock to underperformer rating with 12-month TP of Rs99/share (our price factors in Rs40-50bn of new projects per annum and it includes attractive return on acquisition and all bid assets under pipeline). The key risk to our call is ATL winning new bids of large sizes.