Woah…at current EPS of 7, if we assume 50% dividend payout at Rs. 10 per share for FY23/24, that translates into an EPS close to 20.
That’s a 170% jump in profitability in 2-3 years!
Do you expect this hyper growth to be mainly driven by gas exchange, resumption of renewable certificate trading or just continuous energy trading market share shift onto exchanges?
They are growing their profits at ~30% already. The govt is very motivated to reform the entire electricity sector mostly due to high dues owed by Discoms (collectively all Discoms owe more than ~USD 40 Billion). This year’s Budget was reflective of that. Govt allocated a significant sum to transform the sector and has made clear that going forward all electricity needs to be traded and sourced from exchanges.
These are significant tailwinds for the company.
Even if they keep growing their profits at current rate of ~30%, Net Profit will translate to 600cr in another 4 years.
No new PPAs have been signed for coal based power in last 5 years!
Most new PPAs are either for renewable power or the discom is motivated to source directly from exchange since its cheaper. The moment IEX launches long duration contracts, everyone sourcing from PPAs will be motivated further to buy from exchange.
Then there is added optionality of IGX and renewable energy certificate trading etc.
So there is a high probability that just IEX business will multiply from here on, even if I do not account for IGX into the business.
i think mohnish pabrai is exited long correct me if i m wrong?
Yes. Very much true. He exited around Dec 19 & Mar 20. But LUCKILY I had the conviction to hold on simply because of the excellent NPM & ROCE of this very simple to understand MONOPOLY.
I never invested in Mohnish Pabrai’s other picks like Rain industries & Kaveri seeds ( which I think have actually given better returns than IEX ) simply because those businesses were out of my circle of competence. But I have no regrets about them.
But this conviction surely helped me to average it down from 160 to 120 in March 2020.
This stock also fortified my idea that - Avoid borrowed conviction and study and take your own decision - which is said my many big names like WB and other.
So I check for investment ideas from such investors like MB, but do my own study and then only invest.
Regards,
Vikas
Concall Transcript
Concall Audio
Cross Border Trading
Regulatory Changes
For Participants
Consumers
New Product Launches
Products pending due to various regulatory / legal hurdles which are expected to be resolved
Growth Levers
Technology In-sights
The FY’22 will see fruits of our past investments and our continuing efforts and investments towards technology, innovation and automation. Some new initiatives that our market participants will experience are provision of data insights, APIs, adoption of advanced MILP algorithm and most importantly our web-based trading portal launched recently on April 28 will make the trading experience seamless and far more intuitive for our participants.
Automated bidding option for the customers through the application program interface (API) - customer can connect their IT systems directly with the exchange and place the orders
Option of auto forwarding their un cleared bids of day ahead market into term ahead market
FY22 - Mobile based platform will be launches (Web based platform is already up and running )
Process Improvements that benefit customers
Automated intimations of clearing banks, which now enables us to provide payment credit three to four hours faster than what we used to do earlier, which means that we are earlier on most of the time to create this to happen in the second half and now we are able to do that credit in the first half itself so that customers want to utilize that money to invest in the funds or use it for the investment and other working capital investments.
Organisational Process Improvements
AP rollout within the organization, which makes lot of internal processes much more effective and there are lot of business process automation that we have done, which makes the whole market operations
processes, through which we provide the registration and scheduling, settlement facilities to
the customers that becomes much more effective
Key Learning’s
How this platform will help the existing players to save the costs related overdrawing above from their agreed capacity
"
If you see absolute number of DSM you will not find major change but if we do deep analysis of DSM numbers we have seen that lot of quantum has shifted from DSM to RTM. What happens in DSM is that you are overdrawing from grid and there are various slabs where drawing is more than 12% and a penalty, then there is a 20% slab penalty which is applicable, up to 12% nothing is applicable. We have to purely pay on the basis of DSM prices, but suppose we go beyond 15% then 40% penalty is applicable and after that 100% penalty is applicable. So, what we have seen in most of the cases, there are certain states which were overdrawing their penalty portion and paying high penalty which has now gone down and that quantum has shifted to RTM market. We have seen in many cases where all of a sudden there is a tripping of one big state plant, particularly in Chhattisgarh, two, three times all of a sudden. One plant which was running at 600 megawatt got tripped for some reason and this state was participating in RTM in a very big way, so to make up for the loss
which has happened on account of this plant being off they had no other option than to come to RTM market. Had this market not been there, this would have been done on DSM market and they would have paid very high penalty by overdrawing from there. So as per our analysis lot of shifting has happened. Only thing is absolute number has not gone down to the extent there is no penalty. "
"
August is normally a time when wind season is over in India, and wind generation starts to pick in May and it peaks somewhere in June, July, August and after that it repeats again, so last time we could not take advantage of wind season because by the time we launched this contract, there was not enough wind generation, but this time we are rightly placed and initial five, six months this volume should be very high because of solar which is largely available throughout the year, and wind which is available mostly in the H1.
"
" For all the renewable plants you will find that all the renewable generators have some sort of arrangement with either the consumers or with the distribution companies where they are supplying under certain terms and conditions, so most of these are under long-term PPA, which is up to 25 years, but there are many small generators where they have small quantum PPAs with the consumers in the C&I segment particularly for one year or so. So today we have participation of over 10 generators at our platform already where they have participated and whatever surplus quantum they had, they have started, and in fact there are two, three opportunities for us - one opportunity is where they have tied up very short-term tie-ups and there are many where they have tie-up of one, two, three years. We are targeting those generators because here the realization is pretty good and they can explore this option as well, that is one. Second is there is another set of generators where as per the PPA terms they have to maintain certain utilization in a year so sometimes what happens is, and now particularly because of newer technologies, because of some good year where their
generation is more and they exceed those previous numbers, what we are trying to tell them is when they are going beyond their PPA commitment they can also come to this platform and start selling their surplus power and realize the market prices that are available. But large part of the transactions which are happening today, here the sellers are distribution companies, there are many distribution companies in the country today those who have surplus, there are states like Karnataka which is surplus in both solar as well as non-solar, AP is surplus in both solar and non-solar, Telangana is surplus with solar, Tamil Nadu is surplus with non-solar, Gujarat is surplus in one of the two, similarly Rajasthan is also surplus, so many distribution companies are there who are surplus and we are trying to get
them onboard so that sell side liquidity can be maintained and on the buyer side there is no dearth of demand because since REC trading is not happening most of these buyers they are willing to buy green energy itself for the purpose of getting their RPO and prices are also quite decent"
How IEX can help Discoms / Generators when there is shortage or more supply
"
if you have shortages you come to market and second important thing is when the cheap power is available in the day ahead market many distribution companies today they start to bring down their own generation hence come to this market to optimise on their power cost. Similarly, if the prices are down, if there is ample availability in the market, we see lot of C&I participation increasing and when the prices are down their break even viability
increases and they participate.
"
On IGX Stake Sale
"
We have almost sold now closer to 45% stake and there is no price discovery, can we expect the
remaining stake to be sold at premium?
We have divested about 46% and we do not intend to sell further 30% in the near future so we still have to take a call when we will be doing it and at what premium that will be done so I cannot say anything on that because the Board will take a call, but overall the investment is not going to happen beyond this anytime soon. So currently what is there maybe next some small investment can happen to one of the strategic investors, which can happen maybe in a month or so, but beyond that we are not looking for any further investment and premium we will seek as we go along.
"
Dividend Policy
Seniors if you can post some detailed explanation of REC issue (Case is resolved and they are waiting for the supreme court order, if someone explain in detail about this REC , opportunity etc… if there is a link to understand in detail please post here - Thanks )
Share Disposal
The Head of Business Development of Indian Energy Exchange Limited (NSE:IEX), Rohit Bajaj, Just Sold 45% Of Their Holding
Does anyone know the book keeping regarding share sales in IGX?
Did IEX receive cash/equity?
There are no significant inflows in the cash flow statement and the assets havent gone up significantly either (up approx 300 cr but IGX stake should have been worth significantly more)
They sold IGX shares at face value since the early stake buyers were “strategic investors” (Rs 10 /share). So no materially significant cash inflows
We are also launching a new power exchange with the PTC and ICICI Bank for which we have got a license.
Posting after a long hiatus.
I had posted a few weeks back my thoughts on on IEX and why I love the company:
The most successful businesses are those created with a business model around solving a real customer problem. By solving customer problems and needs, the business is able to demonstrate tangible value proposition to the customer.
“We’ve been doing this for 6-7 months at APTransco, and we managed to save ₹500 crore in FY20. We were well placed to maximise this benefit when spot prices fell on the exchange during the lockdown in March and April. We saved ₹56 crore and ₹132 crore in those two months. We were able to buy power for as low as ₹1.8 a unit at one point."
- Mr Babu, Joint MD , Transmission Corporation of Andhra Pradesh
A top bureaucrat (customer) publicly acknowledging the savings and value IEX delivers to a state power transmission is a clear testimony of company’s clear value proposition and usefulness to its customers.
The COVID 19 pandemic only but helped to accentuate the adoption by various parties due to sudden demand and supply mismatches brought about by the lockdown. The need to re-look at the Power Purchase Agreements (PPA’s) model for securing electricity became apparent to the the distribution companies.
Also the possibility of buying electricity in the spot market at short notice incase of emergency has only ensured that all key players in the electricity value chain are onboarded into the platform.
While investing in companies , I prefer those which enjoy some sort of economic moat rather than a run of the mill company with no tangible competitive advantages.
Pat Dorsey published a beautiful study on economic moats where four types of moats were identified:
a) Intangible Assets
b) Switching Costs
c) Cost Advantages
d) Network effect
IEX as explained in the beginning of this post enjoys one of the most financially rewarding type of moat: The network effect.
As more Discoms , power generators, transmission companies, electricity boards and other key players in the electricity value chain gets onboard on to the exchange the greater will be the “ value” of the platform for the other participants.
Simply put IEX is not just a market leader but IEX is the market. With a market share of 95%, the company is a Monopoly and virtually rules the market. Month after month we get to read press releases that they have had the best month ever.
Everything is interconnected. The company has a strong economic moat with a virtual monopoly and this is reflecting in the numbers. Net profit margins and ROCE hovering around 60% with Zero debt and a growing business, the company boasts of some great numbers.
Corollary to the above point, with very low Capex requirements, a healthy profit margin and Zero debt , IEX is a cash generating machine. Period.
A key factor to consider while selecting an investment is to have a view on the long term prospects of both the company and the industry in which it operates. A leader in a sunset industry is not an ideal long term investment candidate.
However, if you invert the logic- a growing company in an industry with favourable growth prospects augurs well for the investor. IEX is at the right place at the right time.
The share of exchange markets in the overall power market in the developed countries are manifold higher. At just 5%. Indian has only taken baby steps in the power exchange market.
The per capita consumption of electricity in India is a third of the global average as depicted in the table below:
As the Indian economy engine starts revving up again post COVID slowdown and the sustained thrust for Atmanirbhar Bharat continues, the demand for electricity is bound to go up manifold.
Rapid urbanization also drives up the demand and expands the electricity market. Just to put it in perspective, 17 of the 20 among the fastest growing cities in the world are in India.
All these augurs well for IEX.
After decades of neglect , the current Government has launched various schemes and undertaken various policy initiatives to light up the nation and give a boost to the power sector.
The Ministry of Power, in fiscal year 2020, continued its thrust on flagship schemes such as Integrated Power Development Scheme (IPDS), Ujjwal DISCOM Assurance Yojana (UDAY), Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Saubhagya, UJALA, Urban Jyoti Abhiyan (URJA)
All these policy measures are a big positive for IEX.
To be successful in this digital era, every company needs to be technologically savvy. When I read some parts of the management commentary I began to to wonder whether If I was reading about a technology company or a power utility exchange.
I found mentions of IOT, Smart contracts, Blockchain, Robotic Process Automation and many more of the latest technological trends which we normally associate with technology leaders.
The management seems to have got their priorities right by investing in the latest technologies as well as by close collaborations with the academia and research.
Energy Analytics Lab (with IIT Kanpur)
IEX is propelled forward by some strong mega trends and tailwinds namely: Decarbonization, Decentralization, Digitization & Democratization.
Each of these trends are self explanatory. Decarbonization is the global thrust for moving away from fossil energy sources and a focus on sustainable “green” renewable energy sources. Additionally with India being a signatory of Paris Climate agreement, there is a deadline for cutting down on fossil energy sources.
The company has set up the first gas exchange - Indian Gas Exchange in 2020. The company launched on 15th June 2020, is India’s first automated national-level trading platform for physical delivery of natural gas. GAIL, NSDL have all picked up stake in this.
With Natural Gas set to play a pivotal role in the future energy mix of the nation, IGX is well positioned to reap the rewards. So will be the investors of IEX.
I could go on and it must be very apparent to the reader that there are multiple reasons why I simply love this company. However, just as every rose has a thorn, it is prudent to be cognizant of some of the “thorns” which may come back later to hurt the investors.
You can read the reasons not to invest and general intro in the link below:
Happy investing
Very Insightful… Thanks for sharing
Thanks for your PoV. One risk to the network effect is that PTC (largest power trading company in India) is coming up with a new power exchange… They theoretically have the power to move significant market from IEX to their new exchange
There is a big opportunity in this
If pTc comes and fails to deliver than the supremacy of iex will be proved
Yes I agree there is a chance of disruption of market share but ptc story is still in making so we need to wait and watch
The sellers will go where buys are present and buyers will go where sellers are present. So it’s difficult for new exchange to take market share.
Lot of buyers and sellers have integrated their buy sell decisions using APIs provided by IEX. It’s not easy to change and not worth to change the exchange
IEX is basically a software. Users are already used to using this software. Again asking them to learn new software is not worth the gain they will get by using new exchange.
I doubt any new exchange can take away market share unless IEX does something foolish.
Let’s say there is new stock exchange that gets launched tomorrow. Will you go and buy or sell unless you get some benefit? Most likely you first check the volumes price etc before taking any decision. Network effect will play here.
I am not saying there are no risks. But right now at the moment things looks rosy for the company.
Your point is valid, however there is a near term risk of volumes eroding if ptc moves to their new exchange when market coupling (centralized prize discovery which makes exchange’s own network effect irrelevant) is implemented. Read somewhere they transact about ~30% of the exchanges volumes so it would be a significant near term risk
However in the long term the market based energy dispatch should easily cover for it, also if the regulation regarding merging exchanges with <20% market share holds, that might even kill the new exchange after that time and be absorbed by iex
Facebook would have never placed orkut, if I go by your thesis.
Facebook came up with better product than orkut. So there has to be a new offering from New exchange which should be significantly better than IEX
So will just like to highlight on this part. The whole notion that some other exchange creeps up share from IEX doesn’t really have much weight in it.
IEX is eons ahead in technology than any of its peers. As Mr. Ravichand explained, IEX works more like a technology company that happens to have a product in energy trading business than an energy trading company using technology. This subtle difference is what gives IEX the advantage.
Even if price discovery moves away from exchange tomorrow due to some regulation, the volume will stay with IEX solely cause everyone is using its portal. IEX’s trading portal is web based, in line with tech industry, other competitors are still asking users to download and install an application.
Further, when it comes to PSUs and Tech, its like oil and water. They just don’t along for whatever reason.
If I have to explain my theory in a simple one line
IEX = Zerodha + NSE
it has the UI and tech capability of Zerodha and market and volume capability of NSE
