IDFC Securities - Indian Energy Exchange (IEX) Indian Energy Exchanges Q3FY20 results (Outperformer) - New products expected by end of Q4

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IDFC Securities

Mohit Kumar, CFA

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

Q3FY20 result highlights

IEX reported a decline of 9% yoy in trading volume to 13.6BU in Q3FY20. Day Ahead Market for the quarter declined by 14% yoy to 11.1BU which was partially offset by 71% yoy growth in Term Ahead Market at 1.3BU. REC market continues to be weak with 5% yoy decline in volumes. 9mFY20 trading volume declined by 10% to 44BU.
Revenue in Q3FY20 came in at Rs597m (Transaction Fee of Rs554m & Membership Fee of Rs43m), a decline of 6% yoy due to lower demand for electricity in the month of October and November. EBITDA declined by 2.4% yoy to Rs477m (vs Rs489m in Q3FY19). Note that trading margin on REC was raised to 4 paise/Kwh from 2paise/Kwh in 4QFY19.
IEX effective tax rate is 25% (in line with new taxation 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 came it at Rs423m (vs our estimate of Rs379mn) in Q3FY20, flat yoy
Launch of new products: The trial run for the Real Time Market is currently on going and the management expects to launch the product on 1st April 2020. IEX is also in process of launching other two new products (Long-Duration & Cross Border product) by Q4FY20E. All three are expected to start contributing to volumes from FY21E.
Open access volumes contribution has increased to 30% (from 20-25% in FY19) aided by decline in spot prices at exchanges with Industrial consumers finding it attractive to procure power from exchanges).

Key positives: Finalisation of real time market guidelines by CERC

Key negatives: 9% decline in overall volumes.

Impact on financials: Introduce FY22E estimates.

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-FY22E for IEX on back of new product launches, its competitive advantages and lower effective tax rates. We value the stock at a DCF-based target price of Rs190/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.

14/02/2020 9 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 Q3FY20 results (Outperformer) - New products expected by end of Q4

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