Clearly the highlight of the result was the write-off of the entire Rs 43.7 bn Mundra PPAs related Compensatory Tariff (CT), which ADANI had recognised in its top line up to Dec-2016. Rs 36.2 bn CT recognised up to FY16 has been shown as an ‘exceptional’ item, 9MFY17 revenues have been restated to adjust for the Rs 0.75 bn CT recognised previously, and Q4FY17 revenues exclude any CT.
– Consequently, there is a sharp erosion of networth, spike in leverage (long-term external net debt to equity at 13.6x), covenants breach (in our assessment) and management is in a dialogue with stakeholders of the stand-alone entity on remedial measures to restore long-term sustainability of the Mundra project.
– The CT reversal was based on the Supreme Court’s (SC) April 2017 order stating that as promulgation of Indonesian regulation was neither Force Majeure nor Change in Law as per terms of the PPA, ADANI is not entitled for CT on this count. Interestingly though, a component of the CT (we reckon 10-20% of the total CT) which pertains to relief on account of shortfall in supply of domestic linkage coal under its Fuel Supply Agreement (FSA) with Coal India, which the SC has upheld and asked the Central Electricity Regulator (CERC) to compute, has also been reversed.
– Our Q4FY17F earnings forecast built in ADANI continuing to recognise CT for all its plants (including Rs 4.5 bn CT for Mundra). Despite no CT in Mundra’s top line and in-line net generation across all plants, consolidated revenues at Rs 63.5 bn were largely in-line with our/consensus forecast on account of: (i) sharply higher net sales in relation to Tiroda and Kawai PPAs (via third-party purchase and resale of electricity); and (ii) CT for Tiroda and Kawai at Rs 2.5 bn coming in 48% higher vs. our forecast.
– At Rs 13.2 bn, consolidated Ebitda was 12%/24% below our/consensus forecast. Ebitda miss was driven by marginal miss in revenues and ‘other opex’ at Rs 5.2 bn coming in 10% above our forecast; fuel cost at Rs 44 bn was a tad below our forecast.
– Sharply higher depreciation exaggerated normalised net loss to Rs 8.8 bn, 2x/8x vs. our/consensus forecast. Management attributed the spike in depreciation to accounting for ‘Government grants’ wherein all advantages that a company gets from the Government for setting up projects need to be capitalised in fixed assets and subsequently depreciated. Although net finance cost at Rs 13.5 bn was in-line with our forecast interest and other income varied sharply vs. our forecast on the back of derivative linked losses and a few one-offs.
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The write-off of Rs 12.5/share CT in stand-alone accounts pegs ADANI’s consolidated FY17 BVPS at Rs 8.6/share. In our view, full recovery of CT which continues to be booked for Tiroda/Kawai and subject to decisions by the respective State Electricity Regulators, is still debatable. Our earnings estimates for the company remain under review. Maintain Reduce; at CMP, the stock trades at FY18F P/B of 2.3x.
Key metrics for Q4FY17 and takeaways from earnings call
Balance sheet— As of Mar-2017, total debt was Rs 525 bn, vs Rs 523 bn as of Sep-2016. Net D/E was 17.2x as of Mar-2017 on sharply lower equity; (ii) Net fixed assets at Rs 543.2 bn vs. Rs 493.4 bn as of Sep-2016 (accretion relates to government’s grant accounting for the projects); (iii) Trade receivables stood at Rs 99.7 bn vs. Rs 95.2 bn as of Sep-2016.
Securing coal linkages— Under GoI’s new policy on allocation of coal linkages via auction (Project SHAKTI), management stated that while both Tiroda and Kawai plants would bid via quoting a discount to PPA tariffs, participation in coal linkage auction for Mundra (imported coal category), is subject to necessary policy details being made available.
View on Mundra— (i) Management is in discussions with all stakeholders (including the Government of Gujarat, Gujarat Urja Vikas Nigam and lenders) for possible solutions to make the plant sustainable; (ii) ADANI can pursue CERC for relief under Section 79(1)(b).
Sales/realisation— Utilisation was in-line while net sales at 16.7bn kWh was 6% above our forecast (15.8bn kWh) primarily on power purchased from external sources (net sales were higher at Tiroda/Kawai by 11%/20% vs. our forecasts). Blended realisation at Rs 3.8/kWh was 7% below our forecast while merchant realisation at Rs 3.7/kWh was 9% above; merchant offtake at 963mn kWh was 25% below our forecast.
CT: CT booked was at Rs 2.5 bn vs. our forecast of Rs 6.3 bn; the miss was due to nil CT booked at Mundra in Q4FY17 vs. our forecast of Rs 4.5bn, partially offset by higher CTs booked at Tiroda and Kawai at Rs 0.7 bn/Rs 1.8 bn (vs. our forecasts of Rs 0.5 bn/Rs 1.2 bn).