IEX: Subscribe for long-term gains

IEX already has a dominant position, with 99.4% market share of electricity contracts

Indian Energy Exchange (IEX), India’s largest power trading exchange, is coming out with an initial public offering (IPO) to provide exit to existing shareholders (entire IPO is an offer-for-sale). While IEX will not receive any of the funds raised, a consistent financial track-record and high return on equity (around 40 per cent) along with dominant market share is why the IPO stands out. IEX is also net cash-positive, with a balance of Rs 498 crore in FY17. Moreover, IEX’s prospects, which have been supported by government policies towards improving India’s power sector, remain robust as more impetus is expected.
 
Power demand is expected to remain healthy in the long run. Better transmission and distribution infrastructure leading to reducing supply bottlenecks, is another. Improvement in financial health of state electricity boards (SEBs) after the implementation of UDAY (Ujwal DISCOM Assurance Yojana) programme, and thereby better purchasing power of SEBs, and electricity for all are among various initiatives, which will drive electricity demand. As customers seek low-cost power and bridge demand-supply deficits, trading of power, too, will get a fillip. CRISIL estimates power generation and peak power demand in India over FY17-22 to grow at annually by 29.6 per cent and 7.3 per cent, respectively.
 

And, IEX should be a key beneficiary of this. IEX already has a dominant position, with 99.4 per cent market share of electricity contracts (in blocks of 15 minutes) in the day-ahead-market (DAM), 67.9 per cent in term-ahead market and 71.2 per cent in Renewable Energy Certificates (RECs), based on FY17 volumes. DAM, where price discovery is done through double-sided closed auction leading to efficient price discovery, is the biggest revenue contributor for IEX. Contracts for fixed terms in the future (intra-day, day ahead and up to 11 days) are referred to as TAM. IEX started trading of Energy Saving Certificates (ESCerts) from September 26, 2017. The company is now looking at attracting new participants, developing new products and services and expanding into neighbouring countries. 
 
Given the positives, analysts believe the offer is worth subscribing. Motilal Oswal Securities says IEX is well positioned to gain from the fast-growing energy trading segment as proportion of energy traded over power exchanges continues to increase (23.8 per cent in FY13 to 34.5 per cent in FY17) and IEX has delivered decent revenues and profitability growth. While valuations indicate substantial premium for the IPO, Centrum Broking analysts say that it seems fairly valued at a P/E of 44.1x (post dilution) and enterprise value/Ebitda of 31.5x, on FY17 basis.