FREE

Event update: Indian Energy Exchange (Outperformer) - New launches to aid FY21 earnings

We present key highlights of analyst meet with the IEX management.

Key Highlights:

• New product launches to aid volumes: IEX is on the verge of launching short duration contract (from 11 days to 365 days), real time market (RTM) and cross border market over the next 3-6 months. State electricity boards (SEB) and Central Electricity Regulatory Commission (CERC) expect to settle their on-going disputes over the short duration contracts and have withdrawn their petitions. Besides, RTM is awaiting final regulations from CERC and cross border market is awaiting guidelines from Central Electricity Authority (CEA).
• Opportunity size of new products: All the three products have a total opportunity size of 52BU and addressable market size of 35-40BU for short term duration contracts, 16BU for RTM and 1-2BU for cross border contracts. The total volume traded at IEX is 53BU, comprising 4% of total electricity generated (1372BU).
• Gas trading on the cards: In consultation with regulatory bodies and the government, IEX is laying out regulations and processes for gas trading. It is doing all the preparatory work internally to launch the trading businesses and has set up a new subsidiary – India Gas for the purpose. The outlay for the total investment is estimated at Rs400m.
• Open access volumes making a comeback: Open access volumes have grown 68% yoy in H1FY20, driven by current low prices at the exchange, and reduction in open access/cross-subsidy charges in some states. Open access volumes as percentage of total volumes fell from 60% in FY17 to 22% in FY19 at IEX. We expect this business to drive volumes in FY21E.

View and Valuation

IEX is a dominant player in India’s duopolistic power exchange market with more than 94% market share. The exchange is a direct beneficiary of the undergoing reforms in the electricity and energy markets. IEX currently trades at 20xFY21E, which we believe provides comfort, given their domination of the market, high return on equity (>50%) and high pay out. While we understand that FY20E will be challenging, given the low growth in electricity demand plus decline in REC volumes, we expect volumes to grow at normal trajectory FY21E onwards. Besides, volumes can improve materially on the launch of new electricity products in FY21E–FY23E. We maintain our Outperformer rating and value the stock at a DCF-based target price of Rs183/share.