Indian Energy Exchange (IEX)

Setting aside the specific political charges being traded, here’s what I think may get legislated or corrected

Whether PPA or spot, states will have to pay upfront more to get power. On time payment may get discounts.

Much like F&O trading, larger the power needs, more money will be asked to be paid upfront if its state govs. this is not going to work as most states are budget negative

A default by a state and resulting massive disruption in power would cause more safeguards in terms of centralising power distribution and rate charging mechanism. if a state announces 100 units free, it will immediately trigger additional margin payments or collateral money to be provided upfront.

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Good evening everyone,

I wanted to jot down a few clear bullet points as to why I invested (and intend to stay invested) in IEX. Please see below:

• Currently, only 7.5% of the total power generated in India is traded on energy exchanges; the government hopes it can jump to 25% by 2024

• Indian energy consumption itself is growing by leaps and bounds

• Limited competition, with PXIL and HPX

  • With the highest number of market participants on IEX, along with the fact that the size of the pie itself is growing, I am not too concerned about the competition

• Potential to expand to neighbouring countries

• Range of products and services (TAM, DAM, RTM, REC, ESC)

• Potential increase of term in TAM to 90 days – commenced Jul 2022

• Potential of derivatives products

• MBED policy potential – If implemented, all traded power would have to go through exchanges – removing brokers from the equation

• IGX – hidden gem – play on increased use of natural gas, and the government encouraging its trading domestically

• Immaculate financials (screener.in snapshot)

  • 47x P/E
  • RoCE, RoIC and RoE of 63.29%, 68.29% and 48.55%, respectively
  • Nearly debt free
  • 5-year revenue CAGR of 16%, and a 5-year profit CAGR of 24%

• FY22 EBITDA margin of 87.45%!!

I am excited to see where the scrip goes. I have a big bias for platform companies, and unlike some FCF negative VC-incubated companies that are now public, this company is a cash generating machine.

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IEX Analyst Meet 2022 recording: https://www.iexindia.com/pdf/07_09_2022Audio-Recording-of-Analyst-meet-2022.zip

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here we can have a rough idea about TAM like Jockey Only risk is Government Hope major reforms take place in Power which is long due It will happen automatically when states become pauper and no money for free things

Analyst meet 2022 rough notes:

Market based capacity creation potential: Ppp started because of lack of coal allocation. In renewable, no fuel issues. Lender takes a call on fixed cost, that can it be served through the market. Get paid daily basis on exchange, less issue of 6-7months discoms receivables. Financial agencies should see more incentive. seeing few IPPs set up, confidence will go up. Instead of 100% market based capacity, see 25% market based what we are talking now & 75% ppp, lenders get comfort since lenders fund 70% of capital cost. In UK for example, they are adding 30GW addition via 4th round bidding market based approach for renewable capacity creation. US, Europe has adopted market based models for capacity creation, power exchanges key role. Market based adopted by developers, Germany did.
GTAM, so far seen participation by distribution cos who are selling excess renew power on exchange. Going ahead see ipp coming. Very nascent scene.
Green market scale up: creating enablers, doing policy advocacy. When we started in 2008, it took time till today. Sure will increase over next 5-6 years, should be as big as conventional market, coz next 5-6 years even storage can become viable which which really help. Green+storage excellent combination. Green open access reg are more favourable.
(sense is confident over long term, pointed to 2008 saying it will take time)
Open access sharing regulation: provision of charging transmission charge from developers avg 0.4-0.6p. every state different no. An ipp has to pay this charge if he’s selling. If your doing bilateral & counterparty is distribution co, then ipp don’t have to pay this charge. More Cost effective for ipps to do tam market. Use reference price of dam and then to transaction in tam market. Started to increase post Nov 2020 and last year became a material factor. This year first five months this has further increased. Avoidance of transmission charge. Gna regulation has come, another regulation sharing rules in 1-2 months to be notified. Gna was notified in june, have to notify grid code & transmission charge, should get notified in 2-3months and be implemented this calendar year
Post July gain of Mx
No additional USP by any other exchange, no issue with retaining 100% in RTM, 99% dam.
Low power prices give incentive to optimize costs by buying on exchange
Analyst open access has come down since listing, used to be 60%, will green open access open opportunity, don’t see vol pick up inspite of it being there: not 1st time we are seeing drop. This time its longer, many times in the past where a month’s price is very high and open access drops. Purely dependent on market prices. And state regulation. In between seen negative developments, like increase in surcharge, no negative action in last 1 year. Last 1.5 year drop is purely on prices. Seeing buy bids on open access, very few are cleared where prices are very low.
Ebitda% increase: hard to say, can go to 90% also but have to be mindful
Spot to 25% next 3-4 years, states with surplus renewable have incentive to increase capacity as they would be able to sell, some IPs are even considering selling 100% market vs part ppp, part market.
Did a study with deolitte, developer better irrs on market based vs ppp
seen huge transmission investment in country past 7 years, today no congestion, 1 nation 1 pric 99%, area based pricing no more relevant
AT&T losses are still on higher side of 21%, issue of o/s dues continue 2.5Lcr
Open access clearance has come down drastically 60% yoy
Aggregators are there in global. We have only traders in india. Allow aggregators to participate in the spot markets & offer fixed price contract to industrial consumers. They can pick from small set of users. Would be more relevant when we have green open access, like a small consumer with 100kw. Need an aggregator for 50, 60 or 5,10 consumers at once. We are doing
Nepal registered 365mw capacity. Bangla much more potential vs Nepal, Bhutan.
IEX Gas exchange: were waiting for certain enablers, thought govt notification would come. We took the risk of starting before only 2019, new sector for us, and then govt supported us after seeing it can work. Initiative on our end. Started in Jun 20, govt saw market reaction, then govt issued reg in July.
In Europe, look at market size, started slowly with neighbouring countries, then increased. Neighbouring countries need to do policies, most of transmission is locked in long term agreements.
As of now not considering discounts on tam like competitors, maybe in ldc maybe we consider
Gross bidding is basically voluntary, distribtuon co can take a call how much capacity they want to self schedule, how much on market, or how much they want to buy. States found merit, but adoption of this needs time. Awaiting approval. Not happened out. Order is reserved. Then will work with states. Difficult to commit when this will happen, slow process, hired a consultant also to work with 1 big state, work with them, show them benefit and help them also in bidding. Will see what happens.
(does not look likely as per tone)
Gas, gst is the enabler, it’s a showstopper

Disclosure: Invested

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IEX’s hidden asset

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The nice part here is that the assets employed fixed assets+ current assets(loans+trade payables+part of cash) are around 300 crore and current liabilities is 1000 crore.Effectively the capital employed is -700 crore for which it earns 300 crore worth of profits every year.

ROCE = -280 percent.

The only issue here is the valuation.

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Felt like listening to an IT company’s concall rather than an energy exchange.
Only if their earnings calls were as good as these analyst day calls.

Disc: Invested in last 7 days.

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Few concerns -

  1. Other players entry - hence possibility of loosing market share
  2. Mostly short term contracts comes to IEX, long term are done in direct between producer/consumer.
  3. Possibility of state SEBs or Big power players (producer-consumer) to engage in direct contract bypassing energy exchanges
  4. Regulatory risks - margin may be forced to lower, more exchanges can be permitted by regulator
  5. Power being basic necessity items, political pressure (as it is good tool for distributing free of cost “REBRI” by parties) will drag down costs at all power chain - being an exchange may have to work on low commission. etc.
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