IDFC Securities - Indian Energy Exchange (IEX) Indian Energy Exchanges Q4FY19 results (Outperformer) - Beat in estimates led by increase in REC trading margin

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IDFC Securities

Mohit Kumar, CFA

Indian Energy Exchange's Q4FY19 results (Outperformer) - Beat in estimates led by increase in REC trading margin

Q4FY19 result highlights

Overall trading volume declined by 10% in Q4FY19 to 12.4BU. Day Ahead Market and REC volumes declined by 12% and 7% to 9.4BU and 2.5BU while Term Ahead Market grew by 143% to 0.5BU. FY19 volumes grew by 8% to 61BU. DAM and TAM volumes grew by 12% and 53% yoy while REC volumes declined by 4% yoy. Note that volumes related to trading electricity grew by 13% (DAM and TAM)
During the quarter, IEX has removed the exemption on trading margin (2 paise/Kwh) being charged to the buyers of REC. The trading margin on REC volume has increased to 4 paise/kwh (similar to other products).
As a result, Sales increased by 2.3% yoy to Rs564m and EBITDA increased by 3% yoy to Rs448m (vs est of Rs357m) in Q4FY19. Improvement in REC margin has led to marginal increase in sales and EBITDA which was offset by decline in volumes.
IEX reduced tax rate (25% vs 30% in FY18) led to 21% growth in PAT to Rs378m (vs est of Rs317m) in Q4FY19. FY19 PAT grew by 25% to Rs1.7bn led by lower tax rate and volume growth of 8%.
CERC issued a number of regulations and discussion papers in FY19 which should aid in volume growth of IEX going forward (details later)

Key positives: Numerous regulatory discussions to enlarge the role of the exchanges; Finalisation of cross border regulations by CERC; Cross border trading likely to start from Q1FY20; ESCERT to trade in FY20

Key negatives: PTC India seeking in principle approval to CERC to open a new exchange; Decline in open access volumes

Impact on financials: Increase in earnings estimates by 5%/5% for FY20E/FY21E as we account for increase in REC trading margin

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 revised DCF-based target price of Rs193/share, implying 28xFY21 PE. Restriction of open access, new exchange by PTC India and regulatory risk are key risks to our rating and target price

02/05/2019 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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Indian Energy Exchange's Q4FY19 results (Outperformer) - Beat in estimates led by increase in REC trading margin

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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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