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Adani Transmission's Q3FY18 results (Underperformer) - Profit grew by 8x led by tariff order

Q3FY18 results

• Adani Transmission reported EBITDA of Rs14.4bn in Q3FY18 (above estimates of Rs13.1bn), +205% yoy. Profit for the quarter was Rs8.4bn, + 748% yoy (above our estimate of Rs7.1bn) led by the recent tariff order for Mundra Mohindergarh. The total incremental revenues from the order is Rs8.7bn (Rs6.7bn pertains to principal and Rs2bn of carrying cost) and the resultant  increase in  recurring profit is Rs1.1bn per year
• For Mundra Mohindergarh line, under the earlier order, interest cost was recovered from the consumer based on the ECB interest rate of 4.7%.  The recent tariff order for tariff period FY15-FY19E has allowed the recovery of the Indian rupee debt at a rate of ~11%.
• Acquisition of Reliance Infra - WRSS assets was completed on  October 31, 2017 while Pārbati Koldam transmission assets is likely to be completed by Q4 FY18
• During the quarter, Adani Transmission has entered into share purchase agreement with Reliance Infra to buy its Mumbai distribution business at an enterprise value of Rs121bn. Excluding regulatory debt of Rs35bn, which implies a value of 2.8x of the regulated equity. Transaction is likely to be funded by Rs85bn of debt and Rs36bn of equity and equity linked instruments.

Key positives: Higher availability of transmission assets

Key negatives: Expensive acquisition of Reliance Infra Mumbai DISCOM

Impact on financials: We increase our earnings estimates for FY18E/FY19E/FY20E as we fully incorporate the impact of the tariff order and acquisition of Reliance Infra Mumbai Assets (assumed entirely funded by debt for our estimates)

Valuations & view

We expect FY17-19E EBITDA and earnings CAGR to be 34% and 30% respectively, led by final tariff orders for existing assets, commissioning of new assets, acquisition of assets (including Reliance Infra Mumbai  DISCOM) and refinancing-led interest cost savings. Given the rich valuations (35x FY19E earnings and 5.1x FY19E book value), we maintain underperformer rating with a revised 12-month TP of Rs113/share (our price factors in Rs40-50bn of new projects per annum and it includes attractive return on all assets under acquisition and all bid assets under pipeline,). The key risk to our call is ATL winning new transmission bids of large sizes