Indian Energy Exchange Ltd - Stock Valuation and Financial Performance

Decent numbers in the Electricity segment amidst price decoupling worries. Impressive growth seen in Gas Exchange

Indian Energy Exchange | Market Cap: 21,000 Cr

CMP 239| P/E 65x FY23

Results: Indian Energy Exchange (IEX) reported a growth of 38% in sales and 37% growth in power volumes year on year. Operating profit growth during the same period was 42%.

Click here to check 10 Year X-ray of Indian Energy Exchange

Key Highlights:

• The growth in volumes was led by strong traction in new products. Volumes in traditional products were moderate due to higher base in previous quarter. We expect volumes to be strong over near term as we see gradual shift to exhanges.
• The Real-Time Market (~17% of overall volumes) remained one of the fastest-growing electricity market segments on the Exchange, achieving a growth of 70% year on year with 4.8 BU of volumes traded during the quarter.
• The company has announcedan interim dividend of 100% per equity share.

Outlook:The company is awaiting approval to launch the LDC (long duration contracts) comprising of fortnightly, quarterly, monthly and yearly contracts which will significantly boost volumes on the platform.  Management expects factors like rapid urbanisation, 100% electrification under SAUBHAGYA scheme, favourable policies and regulatory initiatives like Draft National Electricity Policy 2021 (NEP) and company specific initiatives like flexibility and efficient price discovery to be drivers for growth.

Indian Energy Exchange | Market Cap: 22,705 Cr

CMP 758 | P/E 85x TTM

Results: Indian Energy Exchange (IEX) reported a growth of 55% in sales and 58% growth in power volumes year on year. Operating profit growth during the same period was 69%.

Click here to check 10 Year X-ray of Indian Energy Exchange

Key Highlights:

• The growth in volumes was driven by substantial increase in electricity consumption and the preference by the distribution utilities to meet their short-term supply requirements in a competitive and flexible manner through IEX.
• The Real-Time Market (20% of overall volumes) remained one of the fastest-growing electricity market segments on the Exchange, achieving a growth of 125% year on year with 5.3 BU of volumes traded during the quarter.
• The company has announced two bonus shares for each equity share held, it doesn’t have any fundamental implication.

Outlook:

• We wait for the management concall to update this section.

Today we recommend Partial SELL on Indian Energy Exchange (IEX) at ~588/share. Offlate, the stock has run up much ahead of its earnings growth. IEX has been rallying on high volumes due to inclusion in F&O (33% in a week), alongwith other stocks that entered F&O. We are not sure if this rally has any fundamental reason.

Even if we assume blue sky scenario on current data, we expect modest upside on fundamental basis. We will continue to hold lower allocation for positive surprise, if any.

We had recommended IEX early September last year at ~195/share.

It takes courage to buy stocks when there is no excitement (Low valuation) and it is painful to sell popular stocks (High valuation). Our process of fundamental analysis and valuation driven approach makes us act counter intuitively by buying low and selling high.

Indian Energy Exchange | Market Cap: 11,184 Cr

CMP 373 | P/E 45x TTM

Recommendation | Hold

Results: Indian Energy Exchange (IEX) reported a growth of 35% in sales and 61% growth in power volumes year on year. Operating profit growth during the same period was 34%.

Click here to check 10 Year X-ray of Indian Energy Exchange

Key Highlights:

• The company launched the Real-Time Market (RTM) which has shaped up well, with the product adding 3.8 billion units in last quarter. This is growing and accounted for 17.5% of the total electricity volumes. 
• The licencing agreement with MCX to launch electricity derivatives in the market in which IEX prices will be used as settlement prices is yet pending due to approval from regulators. 
• The resolution of matter in APTEL regarding REC has been delayed to next hearing on 14^th July 2021. Hence it is expected to start only after Q2FY22.
• The cross-border has been started with Nepal being the first country to participate. The efforts are being made to bring Bhutan & Bangladesh.

Outlook: With increase in industrial activities, the electricity consumption increased by 9% year on year while the peak demand saw 7.4% growth in Q4FY22. The participation in exchange is increasing as the exchange provides flexibility, liquidity, transparency, competitive price and no counterparty risk. This has helped company to increase the market share from 40% in FY20 to 54% in FY21.

As per the management, the localized lockdowns might impact the economic growth in FY22 but the industrial growth won’t be impacted as the companies have planned for this. The management expects a double digit growth in FY22 on account of economic activities, regulatory regimes, power demand of convention and availability of coal.

Moneyworks4me Opinion: We are optimistic on power sector as demand is coming back to match excess supply. At the same time, the inefficiencies across the value chain is expected to be reduced by way of privatisation, lower transmission loss and appropriate pricing to make everyone in the chain profitable. Green energy adoption and peak demand bodes well for volumes traded on energy exchange. Valuation may have run faster than profit growth but we see scope of valuation upgrade, so we will recommend Hold for few quarters to see benefit from operating leverage as volume grows.

*Costs of operations remain same even if volume grows. This leads to profit growth higher than sales growth. This favourable operating leverage can lead to better than expected profit growth.