IEX Highlights December 2020
• Estimated revenue from transactions is up 21.3% for the FY till November end as compared to the same period last FY. Revenues have been supported by DAM, RTM, and G-TAM volumes.
• DAM - On a cumulative basis, FY21 volume and estimated revenue till November end are 18.3% greater than revenue in FY20 for the same period.
• TAM – On a cumulative basis, FY21 volume and estimated revenue till November end are down 53.6% compared to revenue and volume in FY20 for the same period.
• There have been no REC transactions since June 2020.
• RTM – RTM continues to be a strong revenue generator. RTM clocked a 9.7% MoM growth.
• G-TAM – Volumes dropped 21% MoM.
• FY21 estimated revenue contribution break up:
o DAM – 84.3% (-)
o TAM – 3.8% (+)
o REC – 0.6% (-)
o RTM – 10.3% (+)
o GTAM-1.0% (+)
CERC Short term market update (September 2020 report):
• The short-term market witnessed a 12.6% drop in September compared to the same period last year while the long-term market witnessed a 7.6% growth in the period. The overall market growth rate was 5%.
• IEX’s DAM market share fell below 99% for the first time in the period starting from Jan 2018.
• IEX’s TAM market share has been under pressure from 90% in March to less than 20% in September.
• No REC transactions have taken place.
• IEX has a 100% market share in RTM for the second consecutive month.
UPDATE: Previous version incorrectly stated “RTM – RTM continues to be a strong revenue generator, generating more revenues than DAM every month.”
There was a webinar day before conducted by the company, I will share some point from that. If you want the trading numbers, those can be accessed from their website.
A few points discussed in the Q&A were:
GST on NG will be an enabler.
90+% gas currently is supplied from 2 terminals and the contracts are ready.
We are still in the early days like the IEX was but the management said that we have more enablers for IGX in place than they were at the same time for IEX.
Gas is a central subject unlike electricity so gas will not face similar problems as electricity faced in OAC.
Once the spot market is in place, financial products will also come up as the need for hedging arises.
A few other points were technical, based on contract specifications, risk on the balance sheet, regulations in case of default, contract validity in case of pipeline capacity non-availability etc.
I don’t think one should consider Gas Exchange opportunity in any calculations for IEX Business. As per regulations, IEX will have to divest stake down to 26%, so one should consider it more like building an asset, which they will monetize.
Monetization value would be one-off and should be consider as an optionality only.
We want strategic partners in the exchange. Have sent our proposal to GAIL’s EOI. We have other proposals from other gas players as well which we are evaluating. Will share more in next quarter. We would like to keep 51% holding as IEX is a neutral player, and IGX should been seen as a neutral entitiy. We are in talks with the regulator who may not allow such high holding, fair market regulations allow 26% for a player in the market and 5% if you are a member.
PNGRB has proposed a cap on holding to 15% not 26%. Exchanges should be allowed more than 26% as they are neutral entities. We are in discussions. Final decision has not been taken by PNGRB, one is to let exchanges hold more than 26% second discussion is to allow time to reduce below 26%.
Dont assign any value to the gas exchange as of now. I track the sector value very very closely and hence can tell you that. Volumes will take a lot of time to come. Only after that the exchange can ramp up.
For example, Reliance sold all its KG basin gas through a bidding organised by Crisil. They didnt go through the exchange.
One silver lining is that these guys are trying to sell gas in Morbi. If that happens then we can perhaps see some traction.
IEX Highlights
• Estimated revenue from transactions is up 24.7% for the FY till December end as compared to the same period last FY. Revenues have been supported by DAM and TAM and RTM volumes.
• DAM - On a cumulative basis, FY21 volume and estimated revenue till December end are 19.6% greater than revenue in FY20 for the same period.
• TAM – On a cumulative basis, FY21 volume and estimated revenue till December end are down 46.0% compared to revenue and volume in FY20 for the same period. The uptick in volumes has helped reduce the figure from 53.6% reported in last month’s update.
• There have been no REC transactions since June 2020.
• RTM – RTM continues to be a strong revenue generator. RTM clocked a 26.3% MoM growth.
• G-TAM – Volumes further dropped 45% MoM.
• FY21 estimated revenue contribution break up:
o DAM – 83.2% (-)
o TAM – 4.2% (+)
o REC – 0.5% (-)
o RTM – 11.0% (+)
o GTAM-1.1% (+)
CERC Short term market update (October 2020 reports):
• The short-term market witnessed a 13.3% rise in September compared to the same period last year while the long-term market witnessed a 8.4% growth in the period. The overall market growth rate was 8.9%.
• IEX’s DAM market share recovered to above 99%.
• While IEX’s TAM market share has been under pressure from 90% in March to less than 20% in September, a marginal recovery to above 20% was recorded.
• No REC transactions have taken place.
• IEX has a 100% market share in RTM for the third consecutive month.
Looks like it’s firing all cylinders here. Some of the key optionality in this business which I like:
Gas exchange offers good first mover advantage and big growth area
Since all the exchanges now can operate into other verticals, in future, it can also create possibility of merger or acquisition with other exchanges (not sure about any legal angle here, but anybody having more insight can share here)
Once the market is big enough, it can gain pricing power and combination of steady price increase (of course in tandem with regulator’s consent) with decent growth in volume can create compounding engine for years
Opportunities to re-invest it’s cashflow in innovative areas or even to acquire emerging verticals similar to this business in other categories
Disclosure: Tracking; Only for educational purpose
Fast-growing (absolute and relative - its growth is always greater than that of the short term energy market)
Debt-free
High margin (80%)
Free cash-generating
Shareholder committed (50% of profits to be paid out as dividend/buybacks.)
Monopoly (in critical products like DAM and RTM)
asset with a natural moat (market depth) and business model that requires no reinvestment of capital for its growth in a high entry barrier market in a critical sector.
The interesting bit here is that margins will expand even without price change if more transactions take place.
I don’t know enough about the gas market and have left it out of my analysis for now. But the optionality of doing stuff like this because of their position is an incredible thing that’ll give surprising returns even if one of the ventures is successful (assuming there are more to come).
Have been tracking IEX for a few months, like the monopoly nature of the business with strong growth visibility in the next 3-4 years led by:
Launch of RTM which should take share away from DSM market
Launch of LDC contracts which should take share away from traders/brokers
Potential optionality of overall short term market going beyond 10% of power market once thermal PPAs expire
However, valuations have always been a concern. Unlike other domestic exchanges: MCX, (NSE), terminal growth rate of IEX should be much lower since power demand only rises by about 5-6%/year implying terminal earnings multiple of ~15x at cost of capital of 12%-13%. How does one justify current valuations/multiples? While we have strong visibility on IEX gaining share in the short term market from 40% levels to 70-80%; to justify current valuations, isnt Mr Market also assuming that the share of short term power in the overall market will rise significantly above 10% in the near future?
Even I thought RTM would impact DSM. But one consequence has also been RTM eating up the really short term TAM component.(This is why the TAM numbers look scary).
My purchase price is significantly lower. While I’m looking to add more, I wouldn’t do so at current levels or even with significant declines. There was a time when we could have seen a deeper correct again and some buying opportunity opening up. But major support at 180/190 levels came from PPFAS buying. For a long time, there was no coverage and no one was interested. Pabrai and Guy Spiers bought in (that’s how I found it) and Pabrai exited also (not sure why). The past one year there’s suddenly been a lot of coverage. Everyone (not just domestic institutions) seems to be interested in IEX. (take this thread as a proxy - 80 posts from mid 2018 to Jan 2020. The remaining 200 posts since then). This is what is creating an upward pressure. It is a beautiful business model. So it’s not unjustified. But it’s too much in a short span.
DAM and RTM have really shot up this year, but FY20 wasn’t a good year. Early on, their volumes were weak and it picked up later. Most of the volumes on the platform now are being driven by prices being incredibly low. The day prices move up a lot, we could see a weak quarter or two. Apart from that or some macro event, I don’t see a buying opportunity opening in my range in the short term. I continue to keep accumulating cash and waiting. I could be wrong and there could be something I’m not seeing (like the gas exchange). More responses to your query could highlight some unseen aspects.
"…we wish to inform you that the Board of Directors of the Company
in its meeting scheduled to be held on Thursday, January 21, 2021, will, inter alia,
consider declaration of interim dividend to the members of the Company for the
Financial Year 2020-2021.
Further, the record date for the purpose of determining the entitlement of the
shareholders for the interim dividend, if any, approved by the Board will be
Saturday, January 30, 2021. "
What IEX was 10 years back is what IGX now is or have just started, very few trade happens in IGX as there are neither large buyers nor sellers in this platform. It will take time for this market to grow but will surely has all ingredients to grow as the regulator is making all the right changes for the trade to happen on a platform. But, today the trigger for IEX is that the electricity demand is suddenly surging, we reached 187.5 GW peak demand while last peak was ~178 GW a year back, almost an increase of 10 GW which is quite huge. This will substantially rise in the coming summer months. The trade in IEX is increasing, with DAM touching 195 MUs, plus RTM of almost 40-50 MUs, along with TAM etc its a substantial trade and this Q and even the subsequent Qs it is expected that the trade volumes will substantially increase as DISCOMs are not going to meet their demand through long term trade, and most volumes are expected to be traded through the exchange. it is also expected that the suspended REC trading will also start soon.
The risk in the near term in my opinion is how early CERC brings the market coupling, if that is implemented then IEX will probably lose a substantial market share to PXIL. there is lots of optimism in the business growth esp in electricity trading like trading from neighboring countries, LTC etc while IGX has been able to bring in partners but its still early days.
hello,
I agree to your points relating to IGX & IEX.
But I would like to add a point related to market share loosing to PXIL. I feel that IEX would feel the intensity of competition from PXIL and post that who ever would give better service at best price would gain market share (ball can be in anyone’s court). Availability of different types of product might attract people more to be a part of platform like IEX over PXIL.
