IEX was originally promoter by 63 Moons (FTIL) and PFS. Later due to CERC regulations around shareholding they had divested the stakes to multiple PE investors and other companies in the power sector. It is just like BSE, NSE or MCX ownership structure.
In case of all of these companies, regulations do not permit a single entity to hold more than a specific % of shareholding.
In case of 63 Moons, divestment was triggered at the time of NSEL scam, due to which they had to divest stakes in both MCX and IEX.
In case of IGX also similar thing will happen, regulations do not permit IEX to hold more than 25% post 5 years, and we will see shareholding of IGX following a similar path like IEX, MCX, BSE and NSE.
I was trying to evaluate the potential for IGX and the numbers seem fairly underwhelming if my calculations are correct. The value creation potential seems minimal:
Total Gas Consumption in India 2019: 166 mmscmd = 5.9 Mn MMBTU/day
Expected Gas Consumption in 2030: 380 mmscmd = 13.4 Mn MMBTU/day
Average Gas Price Assumed: $4/MMBTU ~ Rs 300/MMBTU
Share of Gas going through Gas Exchange in 2030: 20% (assumption)
IGX exchange fee/MMTU: Rs 1.5 (assume 0.5% of Gas Price, optimistic)
Thus Revenue/Day on IGX in 2030: 0.4 cr/day
Annual Revenue in 2030: 146 cr
Annual PAT in 2030: 87 cr (assumed 60% PAT margin, similar to IEX current margin)
Multiple: 30x (seems standard multiple for exchange businesses)
IGX Value in 2030: 2610 cr
IEX stake in IGX: 50%
Contribution of IGX in IEX 2030 market cap: 1300 cr
Under these assumptions, IEX stake in IGX will only be worth 1300 cr in 2030; 10 years from now which is about 15% of todays market cap.
For reference; if IEXs market cap was to compound at 12% p.a till 2030; its market cap in 2030 would be 22000 cr. In that case, based on these calculations, IGX would then only be contributing ~5% of the market cap. Dont understand what all the excitement is about; seems the potential is fairly limited.
Would appreciate a second opinion on the calculations and assumptions.
Your calculations completely ignores the growth in demand for electricity and natural gas.
India’s energy mix is changing from coal and oil to cleaner alternatives like renewables + natural gas. Expected gas consumption in India will be much more than 13.4Mn MMBTU/day and electricity volumes on IEX should account for a majority of electricity consumption by 2030.
IEX present valuation 8000cr. Lets be conservative and assume its worth 4000cr.
Its worth 4000cr when it facilitates about 4% of India’s energy needs. (40% of 10% short term market)
If gas exchange manages 15% of power by 2030, and IEX manages 1/3rd of this = 5%
If it operates at the same parameters as the electricity exchange, this 5% should be worth 5/4*4000 = 5000cr (assuming a conservative value of 4000cr) assuming electricity require stays constant. If we go by actual present day valuation of 8000cr, then gas exchange will be worth 10000cr in 2030.
The multiple today looks quite high, hence assuming the relative conservative valuation of 4000cr. But others might differ with this assumption
Thanks, I read through the thread, have few basic questions and some points, would be good to know other’s thoughts -
Understand that India’s energy requirements will keep growing, but cost of energy may remain stagnant or even decrease per unit with efficiency and newer sources of energy coming into picture. How does revenue and profits of IEX are aligned. Are they aligned to the per units of energy traded or the “Value” of that energy traded?
If the above thesis of toll-bridge with pernnial cash flow source is true then this can be a no-brainer and one of the best investment and everyone should invest here in such exchanges. But only some do. Also have not come across any huge wealth creator globally in exchange business. Like say top 10 by market cap in any leading nation. If exchanges (typical toll bridge) businesses are such gems then why they do not become big mammoths?
BSE was the oldest exchange with first movers advantage. Today its younger brother NSE is the leader. The network effect and first mover advantage of BSE could not save its numero-uno position.
Strategic investors in Gas exchange is good. But if you closely see energy ecosystem of India in past and present. Many companies in oil & gas had and have cross holdings and invest in stakes for future. It is definitely good for the ecosystem but I would consider it on expected lines.
Disc: Not invested, started to track. Had invested earlier in MCX with typical toll bridge thoughts and have learnt that exchanges/toll-bridges work good in theory but in practice, same river has multiple bridges, new routes come up, new set of entire ecosystems develop…Still interested in this story as a proxy to energy story of India…lets see
IEX doesn’t have price control, pricing (commissions) on trading is deciding by the regulator. If the regulator drops the price in future, IEX will have to comply. The pricing is set for everyone and is the same across exchanges. Where IEX makes money is via increase in trading volumes. Only 4% of India’s electricity is traded on the exchange today, this is bound to increase dramatically in coming decade as govt clears reforms and opens up the electricity distribution sector to private players. Sourcing electricity is cheaper, faster and more economical for the discoms rather than purchasing via PPAs. PPA will soon disappear and I bet post 2025 you will not see any more PPAs being signed.
The do not become mammoths as there is a ceiling on how much you can charge for trading and what %age of total electricity volumes get traded. India’s electricity needs will increase dramatically but there is a still a ceiling on them and the growth will plateau after a point.
What makes this a cash cow is once you have set up the exchange, the costs to run the exchange are minimal. Salary of employees other expenses etc. IEX meets via interests from reserve money it has deposited. Doesn’t take a lot to maintain the exchange and no incremental capex is required.
Only when they set up other exchanges like in case of IGX they would need some money which is still minimal compared to their reserves.
Because of low costs and capex requirements, you get very good dividend yield on your investment. IEX paid Rs 2.5 per share interim dividend this quarter and this dividend will keep on increasing as the volumes on IEX increase.
IEX will never become a reliance or an asian paints in terms of market cap but it will forever keep generating dividends as long as majority of electricity volumes are traded on it.
Also, IEX is eligible to trade renewable certificates. This is the dark horse and something that will make IEX stand out. There is currently a court case pending on this and they are fixing issues with regulator to lift the stay on renewable certificate trading. Once the stay order gets lifted, this is the area that will generate maximum profit for IEX. Tesla’s main income is from selling of renewable certificates.
So don’t value IEX just on the basis of electricity and gas trading. Look at renewable certificates, look at derivative trading of electricity etc.
NSE is the leader as BSE stopped innovating. Volumes on BSE used to be bigger but they never embraced derivative trading when it was introduced in India, NSE on the other hand did. NSE is now the world’s biggest derivative exchange by volume. They were able to move the volumes from BSE by innovating, embracing change and just providing a better experience to their customers.
BSE lost not cause NSE came up, BSE lost as they are a dinosaur who doesn’t want to change with times. Same reason Orkut and Myspace lost to Facebook. Everyone left Myspace and moved to Facebook as it provided a better experience to its users.
The day IEX stops innovating and changing with times, they will lose out on this race as well.
Companies have cross holdings as its mandated by law. Regulator doesn’t want any party to hold more than 25% in any exchange.
@Tar thanks for educating novice users like me, there is one question not answered yet or I am unable to understand.
Let us take toll gate analogy, you pass through the bridge on a 4 wheeler you pay 100 rupees as toll gate (irrespective of type of the car Maruthi or Benz)
Similarly if a trader buys a contract on the platform say 10MW ( 8,000 KW) for 1Crore rupees , now the IEX gets the commission
X amount per KW ?
Fixed amount for the contract ?
IEX charges both the buyer and seller ?
Disc : Inv. Core portfolio - Platform Model Business
That’s a good question. I beleive IEX charges based on per unit of electricity traded, however I am not sure about this. I will research more and get back. If any other investors here have this information, please share that.
I do know, that IEX charges both buyer and seller so it makes money both ways. Similar to how Amazon and Flipkart platform fees works.
