Indian Energy Exchange's Q4FY18 results (Outperformer) - A good year
Q4FY18 result highlights
- IEX reported a 10.4% yoy growth in trading volumes to 13.7BU in Q4FY18. Volume growth in DAM was 12% yoy to in Q4FY18/FY18. REC trading volumes grew to 2.7BU, a decline of 6% yoy. EScert, a new product, saw a volume of 0.2BU in Q4FY18.
- During FY18, volume grew by 32% yoy to 43.3BU. Day ahead market, mainstay of business, grew by 14% to 34.4BU, term ahead market grew by 81% to 1BU, REC market grew by 275% to 6.7BU and EScert, introduced in 3QFY18, reported a volume of 1BU
- As a result, Sales grew by 8%yoy to Rs552m, EBITDA grew by 24% yoy to Rs435m (vs est of Rs362m) and PAT grew by 16% yoy to Rs314m (vs est of Rs299m) in Q4FY18). Sales, EBITDA and PAT grew by 16%, 29% and 16% to Rs1.85bn and Rs1.32bn respectively.
- During FY18, growth in volumes in day ahead market has been driven by trading from distribution companies whose volumes have grown to 30.1 BU(contribution of 64% vs 43% in FY17) of entire volume while open access volumes growth has declined to 17BU (contribution of 43% vs 57% in FY17) of entire volumes on account of higher exchange prices compared to last year.
Key positives: Strong volume growth; Lower Tax rate of 29% in FY19 as per the change in taxation for companies with turnover of less than Rs2.5bn (vs earlier tax rate of 34%); 50% dividend payout
Key negatives: Decline in open access volumes; Decline in annual subscription fees
Impact on financials: We increase our earnings estimates by 5%/4% for FY19E/FY20E to account for lower tax rates in FY19 and FY20
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 20% earnings CAGR over FY18-FY20E for IEX based on its extraordinary track record and competitive advantages. We value the stock at a DCF-based target price of Rs1862/share, implying 18% upside from the current market price (28x FY20E) earnings). Restriction of open access, increase in charges under open access and regulatory risk like capping of transaction fees 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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