IDFC Securities - Indian Energy Exchange Indian Energy Exchanges Q1FY19 results (Outperformer) - Strong volume growth; Definitive Steps to improve liquidity

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IDFC Securities

Mohit Kumar, CFA

Indian Energy Exchange's Q1FY19 results (Outperformer) - Strong volume growth; Definitive Steps to improve liquidity

Q1FY19 result highlights

IEX reported a 32.5% yoy growth in trading volumes to 16.4BU in Q1FY19. Day Ahead market volume grew by 19% yoy to in Q1FY19. REC trading volumes grew to 2.0BU, +344% yoy. Note that REC volumes witnessed high growth in Q1FY19 after regulators directed to restart the solar REC trade from April 2018 (REC trade was halted in April and May 2017).
As a result, Sales grew by 21%yoy to Rs670m and EBITDA grew by 29% yoy to Rs545m (vs est of Rs498m) in Q1FY19. Sales growth is lower than volume growth on account of higher growth in low margin REC volumes.
Tax rate during the quarter in Q1FY19 is in line with reduced corporate from 30% to 25% for companies with turnover less than Rs2.5bn in FY2016-17 (provision in the budget). PAT grew by 33% yoy to Rs419m (vs est of Rs373m) in Q1FY19.
IEX has also declared a dividend of Rs22/share in FY18 (51% dividend payout). In addition, It announced stock split of 1 share into 10 shares. Besides, the board also gave approval to raise the FII limit into IEX to 49% (from currently 24%). This should improve the liquidity in the stock.

Key positives: Strong volume growth of 33%; Lower Tax rate of 29% in FY19 as per the change in taxation for companies with turnover of less than Rs2.5bn (vs earlier tax rate of 34%); 50% dividend payout

Key negatives: Decline in transaction fees by 13% to Rs55m

Impact on financials: We maintain our earnings estimates in FY19E/FY20E.

Valuations & view

IEX, is a dominant player in India’s duopolistic power exchange market with 94% market share. The exchange is a direct beneficiary of undergoing reforms in the electricity and energy markets. We estimate 20% earnings CAGR over FY18-FY20E for IEX based on its extraordinary track record and competitive advantages. We value the stock at a DCF-based target price of Rs1874/share, implying 18% upside from the current market price (28x FY20E) earnings). Restriction of open access, increase in charges under open access and regulatory risk like capping of transaction fees are key risks to our rating and target price

10/08/2018 6 EN

Underlying

Indian Energy Exchange

Indian Energy Exchange Limited is an India-based company that offers an electronic platform for the trading of electricity products. Its products include day-ahead-market (DAM) electricity contracts, term-ahead-market (TAM) electricity contract, Renewable Energy Certificates (REC) and Energy Saving Certificates. Its participants are able to participate in a uniform price double-sided closed auction process. Buyers and sellers electronically submit bids during the market session and the matching of bids is done on double sided closed auction mechanism with uniform market clearing price. Its exchange enables trading in weekly contracts, which includes day-ahead contingency contracts, intra-day contracts, daily contracts and weekly contracts. RECs are traded on the last Wednesday of a month. The Company's electronic platform offers a suite of settlement services, including electronic trade confirmation, clearing services and risk management functionality.

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INE022Q01012 India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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Analysts

Mohit Kumar, CFA

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Indian Energy Exchange's Q1FY19 results (Outperformer) - Strong volume growth; Definitive Steps to improve liquidity

Indian Energy Exchange Ltd: 2 directors

Indian Energy Exchange's Q4FY18 results (Outperformer) - A good year

GMR Infrastructure's Q3FY20 results (Outperformer) - Air traffic growth improved at the airports; deleveraging process gains momentum

Ambuja Cement's Q4CY19 results (Outperformer) - In line; cost efficiencies at play

Event update: Aurobindo Pharma (Outperformer) - Unit IV receives EIR; positive outcome

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