ValuePickr Forum

Indian Energy Exchange (IEX)

Here goes my first post on this forum.

Background

Indian Energy Exchange Limited is an India-based company that offers an electronic platform for the trading of electricity products. Its products include day-ahead-market (DAM) electricity contracts, term-ahead-market (TAM) electricity contract, Renewable Energy Certificates (REC) and Energy Saving Certificates. Its participants are able to participate in a uniform price double-sided closed auction process. Buyers and sellers electronically submit bids during the market session and the matching of bids is done on double sided closed auction mechanism with uniform market clearing price.

Indian Electricity Market Overview

Conventional generation in FY17 was 1,155 bn units out of which short term volumes were 10.3%, i.e., 119 bn units. Out of the short term volumes, 34.5%, i.e., 41 bn units were traded on power exchanges. IEX had a 98.5% market share in power exchange volumes.

The outlook is that short term volumes would increases to 11% of the total generation by FY20 and volumes transacted on power exchanges should increase to ~ 40%.

Pricing

IEX charges 2 paise/ unit from the buyer and 2 paise/ unit from the seller.

Competition

NSE has a power exchange called Power Exchange India Limited (PXIL) that has negligible market share and in losses.

Risks

  1. Regulation of pricing by the regulator
  2. Competition from PXIL
  3. High prices that reduces private volumes
  4. Low participation of renewable energy players

Financials

FY18 Revenue - Rs 230 cr (89% transaction fees, 11% admission and annual fees)
FY17 revenue - Rs 199 cr (86% transaction fees, 14% admission and annual fees)
FY18 EBITDA - Rs 185 cr
FY17 EBITDA - Rs 143 cr
FY18 PAT - Rs 132 cr
FY17 PAT - Rs 114 cr
FY18 volumes - 56,842 mn units (81% electricty, 16% REC, 3% ECert)
FY17 volumes - 45,146 mn units (90% electricity, 10% REC)
FY18 ROE - 46.9%
FY17 ROE - 47.7%
FY18 Net Cash - Rs 380 cr
FY17 Net Cash - Rs 510 cr

Investment Thesis

  1. The overall electricity market is growing at ~ 5-6%. Short term volumes are a still a small part of the overall volumes. Globally the numbers are much higher and given the fact that discoms are also finding it difficult to honor long term agreements, short term volumes should increase.
  2. The share of exchanges in the short term market should also increase given the transparency and flexibility on exchanges
  3. Pricing on exchanges is lower compared to power traders with fixed margins
  4. IEX has recently acquired the technology and employees from FTIL, which has improved margins

Shareholding

No promoter holding. TVS Shriram Fund holds 15% followed by DCB Power Ventures at 10%. Westbridge Capital holds ~5%.

Valuation

The company got listed at Rs 1,650 in October and it trades around Rs 1,620 currently. At FY18 EPS of Rs 44, IEX trades at a P/E of ~37 and on FY19E EPS of Rs 51 it trades at a P/E of 32. Valuations are high given that volumes/ earnings should grow at a CAGR of 12-15%. But i guess the market is pricing in long runway available for increase in volumes.

Request views of other participants on the investment thesis and where it could go wrong.

Disclosure - Have a small position

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Good initiation post :+1: I may be able to add value to this discussion as my mother works as an engineer in a state DISCOM’s load dispatch center (this is responsible for buying electricity via open access if there is a generation shortfall).

Followup questions

  1. Can you elaborate a bit on the first 2 products - DAM and TAM?

  2. Also, a very important criteria when evaluating a company is the management track record. Their education, brushes with the law if any, integrity etc. Can you throw some light on this?

  1. What is a power trader? Do they also operate on these exchanges?
  1. DAM is for trades for the next day. IEX has trading blocks at 15 minute intervals.
  2. TAM is for trades up to 11 days in advance.
  3. Power traders are like PTC. They charge a commission of up to 7 paise/ unit depending on the unit price of power (4 paise/unit up to Rs 3 /unit and up to 7 paise/ unit above Rs 3/ unit)
  4. The MD & CEO Mr. Satyanarayan Goel has 38 years of experience with NTPC and PTC. The other senior management team also has experience in the power sector. I must confess that I don’t consider myself an expert at judging management. The board of directors include Vallabh Bhansali (Enam), Renuka Ramnath (Multiples) and Gopal Srinivasan (TVS)

Maybe you can ask your mother about her views about IEX and post them here as well.

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Q1 results out. Volume and revenue growth of 22%, PAT growth of 33%.

https://simplywall.st/stocks/in/diversified-financials/nse-iex/indian-energy-exchange-shares/news/who-just-sold-their-shares-in-indian-energy-exchange-limited-nseiex/

Can some one explain this?

Its may be ESOPs these top management gets as part of CTC …

In-spite the best company in power exchange business and good future growth, the big risk is govt. policy, which could affect business of this company.

From annual report FY17-18: “IEX is governed by Central Electricity Regulatory Commission (Power Market) Regulations, 2010 and also the Business Rules, Rules & Bye – laws approved by CERC. Any deviation from any of the provisions would be of significant risk to IEX”

Is anyone perform detail study on risk and its probable impact on govt. policy on this company?

Biggest risk would be the regulator capping the margins that the exchange is charging. IEX currently charges 4 paise per trade, which is inline with what market traders charge. Reducing this margin would be a big blow to the exchange’s profitability.

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A good read on IEX - https://dhruvapandey.wordpress.com/2018/08/26/my-assessment-on-iex/

Anyone understand how DEEP platform works ? and what role PTC india play on short term trading of power ?
Why IEX would have an edge over them anyway ?

DEEP offers power purchase agreements more than 2 weeks to roughly 6 months in advance whereas IEX offers Day ahead contracts and contracts up to 11 days in advance. So strictly speaking DEEP and IEX are not in competition. Plus IEX offers more flexibility regarding purchase options cf. to DEEP. If IEX starts offering monthly derivatives contracts I feel it would be a game changer. Not sure but PTC India would be a member of IEX where they can collate orders and place on the exchange plus they do bilateral off exchange deals as well

Just read today that PTC India is proposing to launch a power trading exchange in collaboration with BSE…it is going to compete with IEX.

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Yes. Very surprising as PTC was the promoter of IEX. NSE also is a competitor but doesn’t have much market share. I don’t think the market is big enough to have 2 fully functional exchanges.

Bullish H&S breakout has happened -

Technically it could go up to 1950 now …

Anyone able to understand series of regulation changes and its affect on IEX business - ?

Is it good or bad for IEX ?

Good for iex … Most of it. CERC has accepted most of IEXs proposals. Also, it has stated that it will only approve or disapprove any changes in the charges.Thi implies that it won’t exactly set prices.However, it has set caps on fees in earlier regulations.A new problem is that IEX has to share at least 70 % the interest on security deposits with the customers who gave the security deposit. This was basically free money for the exchange. But I don’t think it will have a huge impact on the exchange.

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Does anyone know whether power exchanges are used as a last resort for procuring power or is it a planned procurement source?

It’s little more dynamic than that. Usually Discom will do a cost benefit analysis of buying from market (IEX) , buying from suppliers directly or contracted capacity. It also depends if their demand/supply forecast is correct and are not forced to buy at last moment, which is usually IEX.

Cool, Thanks. IEX has been claiming that peak power demand can be met through power exchanges while base demand should be met through PPAs. However, during peak hours, the MCP also goes up. So is it actually viable for discoms to depend wholly on exchanges for meeting peak power requirements ?

We are not a power surplus country as such and hence discoms prefer PPAs as there is no guarantee of availability of power in the spot market. As and when capacity increases the market should move towards an ideal mix of spot and term. The flipside of tying up PPAs is when discoms don’t draw enough power they still have to pay capacity charges to the producer which don’t have to pay if they buy under IEX.

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