IDFC Securities - Indian Energy Exchange (IEX) Indian Energy Exchanges Q2FY20 results (Outperformer) - New products launch will improve growth visibility

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IDFC Securities

Mohit Kumar, CFA

Indian Energy Exchange's Q2FY20 results (Outperformer) - New products launch will improve growth visibility

Q2FY20 result highlights

IEX reported trading volume of 15,9BU, a decline of 8% yoy in Q2FY20. Overall, volume in electricity market grew by 3% yoy during the quarter - Day Ahead Market declined by 6% yoy offset by sharp jump of 5.3x in Term Ahead Market to 1.6BU. REC market continues to witness weakness with 58% yoy decline in volumes. H1FY20 trading volume declined by 10%.
Despite 8% decline in volumes, Sales grew marginally by 1% yoy to Rs675m on account of increase in REC trading margin. EBITDA declined by 2.6% yoy to Rs533m (vs est of Rs551m) in Q2FY20. Trading margin on REC was raised to 4 paise/Kwh from 2paise/Kwh in 4QFY19.
IEX effective tax rate will decline to 25.2% as it has opted for new tax regime. Note that IEX earlier effective tax rate was 29% (for a company with sales of less than Rs4bn). As a result, profit after tax grew by 14%yoy to Rs488mn (vs our estimate of Rs457mn).
IEX is in process of of beefing its teamfective tax rate was 29% (for a company with sales of less than Rs4bn) lumes declined in Q2/ ects DFCC to belaunching three new products - Real-time, Cross border & short –term standard contracts (of more than 11 days and up to 3 months). All three are expected to start contributing to volumes by end of FY20.
Open access volumes contribution has increased to 30% (from 20-25% in FY19) aided by decline in spot prices at exchanges.

Key positives: Lower effective tax rate of 25.2%; increase in open access volumes

Key negatives: 8% decline in overall volumes

Impact on financials: Downgrade our EPS estimate for the FY20/FY21 to Rs5.8/7.0 on weaker growth in volume in H1

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 13% earnings CAGR over FY19-FY21E for IEX based on its extraordinary track record, competitive advantages and lower effective tax rates. We value the stock at a DCF-based target price of Rs183/share, implying 26xFY21 PE. Restriction of open access, new exchange by PTC India and regulatory risk are key risks to our rating and target price.

30/10/2019 10 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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Indian Energy Exchange's Q2FY20 results (Outperformer) - New products launch will improve growth visibility

MOSL: IEX (Neutral)-Strong electricity volumes drive profit

Indian Energy Exchange's Q3FY20 results (Outperformer) - New products expected by end of Q4

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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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