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Adani Transmission's Q2FY19 results (Outperformer) - Below estimates; Regulator disallows revenue

Q2FY19 results

• Adani Transmission EBITDA came in at R6.9bn (est of Rs6.5bn), 6% yoy  and adjusted profit was Rs1.7bn (est of Rs2.0bn), + 150% yoy in Q2FY19. The increase in EBITDA and PAT was on account of favourable tariff order for Mundra Mohindergarh in Q3FY18 (Recurring profit grew by Rs2bn per annum). Profit has been adjusted for revenue disallowance of Rs890m post the true up of accounts for prior years
• Adani Transmission acquired Reliance Infra Mumbai DISCOM on 29^th August 2018. The acquisition has been funded by long term debt of Rs85bn, short term loan of Rs5bn and equity of Rs38bn. Out of Rs38bn, Adani Transmission raised Rs32bn of unsecured perpetual securities from the promoters. During one month of operation, Mumbai DISCOM reported EBITDA of Rs2bn and PAT of Rs176m
• Total capital expenditure under all the tariff based competitive bid (TBCB) projects is Rs58bn. Out of which, Rs30bn has been spent till date. It has won a new TBCB projects with a cost of Rs18bn during Q1FY19. Adani Transmission has partially commissioned the TBCB projects. The total revenue was Rs380m from TBCB assets. Out of 8 assets, 5 assets are likely to get commissioned by FY19.
• Adani Transmission has entered into an agreement to acquire  KEC Bikaner Sikar Transmission at a EV of Rs2.3bn (8x EV/EBITDA)

Key positives: Acquisition of Mumbai DISCOM and agreement to acquire KEC transmission asset; Higher availability of transmission assets

Key negatives: Expensive acquisition of Reliance Infra Mumbai DISCOM

Impact on financials: We increase our earnings estimates for FY19E/FY20E by 14% and 22%  (Our earlier estimates assumed acquisition funding by debt of Rs121bn; Revised estimates account for the funding by debt of Rs90bn and by way of Rs32bn of perpetual securities – no impact of 11.80% interest on these on income statement)

Valuations & view

We expect FY18-20E EBITDA and earnings CAGR to be 55% and 52% respectively, led by favourable order for Tiroda Aurangabad assets, commissioning of new assets, acquisition of assets (including Reliance Infra Mumbai DISCOM) and refinancing-led interest cost savings. Given the rich valuations (18x FY20E earnings and 3.6x FY20E book value), we maintain underperformer rating with a TP of Rs113/share (our price factors in new project win of Rs40-50bn per annum,  and assumes an attractive return on all assets under acquisition and all bid assets under execution). The key risk to our call is ATL winning new transmission bids of large sizes