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Alpha | Indian Energy Exchange Ltd. – Equity Research Desk

August 12, 2024 . Equities Desk

Alpha . Equity Research

Indian Energy Exchange Ltd – Transforming power markets

Indian Energy Exchange Ltd (IEX), established in 2008 and headquartered in New Delhi, is India’s leading electronic trading platform for electricity, renewables, and certificates. It operates under the Central Electricity Regulatory Commission (CERC), facilitating energy transactions through a double-sided closed auction process. IEX earns primarily from transaction fees, with additional income from membership fees, annual subscriptions, market data sales, and other services. As of Q1FY25, IEX has a strong ecosystem of over 7,900 registered participants, including 4,900 commercial and industry players, and 2,100 renewable energy generators and obligated entities.

Products and Services

Electricity Market:
Day Ahead Market (DAM): Power delivery within 24 hours of bidding.
Term Ahead Market (TAM): Buy/sell electricity on a term basis.
Real Time Market (RTM): Power delivery within an hour of bidding.
Cross Border Electricity Trade (CBET): Trading with South Asian countries in DAM and RTM.
Green Market:
Green DAM & Green TAM: Facilitates trading of renewable energy (solar, wind).
Certificate Market: Represents 1 MWh of energy saved or generated from renewable resources.

Subsidiaries – As of FY24, the company has one subsidiary and one associate company.

Growth Strategies

Market Leadership: IEX leads in DAM & RTM segments with a market share of 45-50% in DAC, Daily & Long Duration Contracts, and certificates. The overall market share in FY24 was 83-84%, which the company aims to maintain.

New Products & Initiatives: Plans to introduce Green RTM to capitalize on renewable energy growth, pending CERC approval.

Exploring Peer-to-Peer (P2P) trading opportunities, particularly for retail consumers generating their own electricity (e.g., rooftop solar).

Indian Gas Exchange (IGX): IEX holds 47.28% equity in IGX, India’s first automated gas exchange.

IGX holds a 10% market share in natural gas spot trading, with cumulative volumes of 100 million MMBtu in three years.

Financial Performance

Q1FY25

Volume: 30.4 BU, up 21% YoY from 25.1 BU.
Electricity Volume: 28.2 BU.
Certificate Volume: 2.2 BU.
Revenue: Rs.155 crore, up 21% from Rs.127 crore YoY.
Operating Profit: Rs.100 crore, up 22% from Rs.82 crore YoY.
Net Profit: Rs.96 crore, up 27% from Rs.76 crore YoY.
Market Growth: RTM +27% YoY, TAM +28% YoY, Green Markets +94% YoY.

FY24

Traded Volume: 110 BU, up 13.8% YoY.
Electricity Volume: 102 BU, up 12% YoY.
Certificates Traded: 84 lakh (RECs and ESCERTs), up 37% YoY.
Revenue: Rs.449 crore, up 12% YoY.
Operating Profit: Rs.379 crore, up 12% YoY.
Net Profit: Rs.351 crore, up 15% YoY.

Financial Performance (FY21-24)

Revenue CAGR (FY21-FY24): ~12%
PAT CAGR (FY21-FY24): ~19%
3-Year Average ROE: ~41%
3-Year Average ROCE: ~54%
Capital Structure: Debt-to-equity ratio of 0.01, indicating strong financial stability.

Industry outlook

Diverse Power Sector: India’s power sector is highly diversified, including conventional sources (coal, lignite, natural gas, oil, hydro, nuclear) and non-conventional sources (wind, solar, agricultural, domestic waste).
Global Position: India is the third-largest producer and consumer of electricity globally, with an installed capacity of 442.85 GW as of April 30, 2024.
Short-Term Market Growth: The short-term market now represents 13% of total generation, up from 12% in FY23. Power exchanges specifically account for 8% of this market, up from 7% in FY23.
Growth Drivers: Increasing population, a booming manufacturing sector, and rapid infrastructure developments (e.g., EVs, rooftop solar, railway traction, data centers) are expected to drive further growth in electrification and per-capita electricity usage.

Growth Drivers

Increased Government Funding: The 2024 Budget allocated 50% more to power sector initiatives, focusing on green hydrogen, solar power, and green-energy corridors.
FDI Boost: 100% Foreign Direct Investment (FDI) is allowed in the power sector, enhancing FDI inflow.
PM-Surya Ghar Scheme: Provides free rooftop solar systems offering 300 units per month to one crore households through the Muft Bijli Yojana.

Competitive Advantage

IEX is a moat in its business segment and there is no listed competitor with a similar range of operations.

When compared to the Multi Commodity Exchange of India Ltd., IEX is undervalued while generating robust returns on invested capital.

Outlook

Market Position: IEX, with a strong debt-free capital structure and minimal operational expenses, is well-positioned to leverage opportunities in India’s power sector.
Performance Drivers: Strategic growth initiatives, a leading market position, and a monopoly in the Indian energy exchange segment.
Expansion: Expanding product mix to align with market needs, expected to enhance operational scale and margins.
Future Prospects: Continued market penetration and robust returns anticipated as IEX capitalizes on sector growth.

Valuation

Given the sustained strong demand for electricity and the expected expansion of electricity exchanges due to enhanced price discovery, IEX, as the market leader, is ideally positioned to take advantage of these favourable conditions. We recommend a BUY rating in the stock with the target price (TP) of Rs.228, 51x FY26E EPS.

Risks

Regulatory Risk: The highly regulated nature of the power sector, with price and incentive decisions made by the government, poses a significant risk. Initiatives such as free electricity could impact the company’s turnover.
Lack of Pricing Power: Limited ability to negotiate prices with large corporations and state/government entities may pressure profit margins.

Note: Please note that this is not a recommendation and is intended only for educational purposes. So, kindly consult your financial advisor before investing.