IDFC Securities - Indian Energy Exchange (IEX) Indian Energy Exchanges Q1FY20 results (Outperformer) - Weak volumes; cross border trading to start from Q2

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IDFC Securities

Mohit Kumar, CFA

Indian Energy Exchange's Q1FY20 results (Outperformer) - Weak volumes; cross border trading to start from Q2

Q1FY20 result highlights

Overall trading volume declined by 13% in Q1FY20 to 14.2BU. Day Ahead Market and REC volumes declined by 14% yoy and 41% yoy to 12.0BU and 1.2BU while Term Ahead Market grew by 137% yoy to 1.0BU. Note that volumes related to trading electricity declined by 10.4% yoy (DAM and TAM). FY19 volumes grew by 8% to 61BU.
IEX had increased trading margin to 4 paise/Kwh (similar to other products) from 2 paise/Kwh. Compared with earlier practice of charging only sellers, IEX has started charging 2 paise/Kwh to buyers also.
As a result, Sales declined by 9% yoy to Rs606m and EBITDA declined by 9% yoy to Rs494m (vs est of Rs498m) in Q1FY20. Improvement in REC margin has mitigated the decline in Volumes.
IEX effective tax rate was 29% (vs 34% earlier) in FY19 as the budget had made a provision of lower tax rate for companies with sales
Cross border trading on exchanges and trading of longer term duration s are likely to aid in volumes in FY20. An agreement has been reached between Forwards market commission and CERC thus, all delivery based contracts will be traded on IEX in few months

Key positives: Cross border trading likely to start from Q2FY20; ESCERT to trade in FY20; lower tax rate to continue for next three years

Key negatives: 13% decline in volumes

Impact on financials: Downgrade our estimates for FY20 due to weakness in Q1FY20 volumes. Increase our earnings estimates for FY21 by 7% to account for lower tax rate

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 15% earnings CAGR over FY19-FY21E for IEX based on its extraordinary track record and competitive advantages. We value the stock at a revised DCF-based target price of Rs183/share, implying 25xFY21 PE. Restriction of open access, new exchange by PTC India and regulatory risk are key risks to our rating and target price

07/08/2019 1 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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INE022Q01020 National Stock Exchange of India 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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