Indian Energy Exchange's Q3FY19 results (Outperformer) - Regulatory discussion to enlarge exchanges role
Q3FY19 result highlights
- IEX day ahead market volume grew by 21% yoy in Q3FY19 and TAM market grew by 33% to 0.8BU in Q3FY19 while REC trading volumes declined by 78% yoy to 1.2BU and absence of ESCERT Volumes. As a result, overall volume declined by 17% yoy to 14.9BU. During Q3FY18, REC volumes witnessed a spurt due to lower volumes in H1FY18 (uncertainty on account of legal cases) and ESCERT Volumes was 1BU traded only during Q3FY18 (will be traded after completion of PAT cycle).
- As a result, Sales declined by 2% yoy to Rs638m and EBITDA declined by 7% yoy to Rs489m (vs est of Rs510m) in Q3FY19. Decline in sales and EBITDA is lower than overall volume decline due to favourable mix towards higher margin electricity volumes (margin in electricity volumes is 4ps/Kwh vs REC volumes yielding 2ps/kwh
- Tax rate in 9mFY19 is in line with reduced corporate tax from 30% to 25% for companies with turnover less than Rs2.5bn in FY2016-17. As a result, PAT grew by 17% yoy to Rs427m (vs est of Rs399m) in Q3FY19.
- Note that CERC has approved the the transaction fees with the rider that the future changes in transaction fees will need CERC approval. As a result, overhang on capping of transaction margin has gone away.
Key positives: Budget extended tax provision of 25% for FY20E; Numerous regulatory discussions to enlarge the role of the exchanges; Buyback of shares worth Rs690m (50% of the profit)
Key negatives: PTC India seeking in principle approval to CERC to open a new exchange
Impact on financials: Minor changes in earnings estimates in FY19E/FY20E; introduce FY21 EPS of Rs6.4/share
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 FY18-FY21E for IEX based on its extraordinary track record and competitive advantages. We value the stock at a DCF-based target price of Rs186/share, implying 28xFY21 PE. Restriction of open access, increase in charges under open access, new exchange by PTC India and regulatory risk are key risks to our rating and target price​
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.
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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