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
- Regulation of pricing by the regulator
- Competition from PXIL
- High prices that reduces private volumes
- 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
- 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.
- The share of exchanges in the short term market should also increase given the transparency and flexibility on exchanges
- Pricing on exchanges is lower compared to power traders with fixed margins
- 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
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).