Indian Energy Exchange Ltd: Brief Analysis
(An update 19Nov2022 on buyback proposal is available here.)
(Disclaimer: This is just for information purposes only; this is not an investment recommendation. Prospective investors should consult their investment advisors before making any trades. It's safe to assume the author has a vested interest in all stocks / financial products discussed here.)
Indian Energy Exchange Limited or IEX - Brief Analysis:
CMP Rs 139; market cap Rs 12,500 crore (close of 17Oct2022)
Business model
- IEX, India's first power exchange, has been operating since 27 June 2008
- IEX offers various compelling choices to trade in – Electricity Market, Green Market and Certificates
- IEX is an automated trading platform for physical delivery of electricity and renewable energy
- its market share in power trading is between 85% and 90% currently
- As per Accounting Standard AS 108, the company has only one operating segment, that is, power segment
- India’s total generation was 1483 billion units of electricity in financial year 2022 as per CEA data, out of which 75% was generated from thermal, 10% from hydro, 11% from renewables, and 3% from nuclear (IEX annual report FY 2021-22)
- India's installed capacity in power sector (FY 2021-22):
Total 399 GW
Thermal 236 GW (59.1%)
Renewables 110 (27.5%)
Hydro 47 GW (11.8%)
Nuclear 7 GW (1.7%)
- The Plant Load Factor (PLF) of thermal power plants monitored by the Central Electricity Authority stood at 58.9% in financial year 2021-22, compared to 54.6% in financial year 2020.
- IEX established a gas exchange also, named Indian Gas Exchange (IGX)
- IGX is India's first automated gas exchange for gas trading
- IGX started operations on 10Dec2020 after taking Gas Trading Platform license from Petroleum and Natural Gas Regulatory Board (PNGRB)
--
IGX is promoted by IEX and NSE Ltd; IGX's strategic investors include
Gail (India) Ltd, ONGC Ltd, Indian Oil Corporation, Adani Gas and
Torrent Gas
Listing
- IEX share was listed on BSE and NSE on 23Oct2017
Risks
- "Market coupling" mechanism by CERC whereby 'order matching' and 'price discovery' will be done via an independent Market Coupling Authority
Competition
- competition is growing for IEX, with another two players starting operations
- IEX is practically a monopoly, but this could change in the next few years
- As on 17Oct2022, there are three power exchanges (PE) in India
- Power Exchange India Ltd (PXIL) is India's second PE
- PXIL is promoterd by NSE Ltd and NCDEX Ltd
- Hindustan Power Exchange (HPX) (erstwhile Pranurja Solutions Limited) is India's third PE
- HPX is promoted by PTC India Ltd, BSE Ltd and ICICI Bank
- HPX started commercial operations on 06Jul2022
Shareholding
- As per the latest shareholding (30Jun2022), IEX doesn't have any promoters; it's professionally managed
- FPIs hold 21% stake; DIIs 22% and public 57%
- Aquamarine Master Fund (Guy Spier's Aquamrine Capital Mgmt) holds 1.47% stake (consistently since Sep2019, as per available records)
Solvency
- its debt-equity ratio is zero (a cash-rich company)
Valuation as on 17Oct2022
- At CMP of Rs 139 (market cap Rs 12,500 crore), its TTM P/E ratio is 40.2, P/B is 18.1 and P/S ratio is 28.5
- the share's all-time high (ATH) is Rs 318 on 19Oct2021; and it's down 57% from its ATH
Profitability
- Its OPM (operating profit margin) is between 80% and 85% in the past 3 years
-
its gross profit margin (GPM) is 100%; operating profit margin (OPM) is
82.4% and net profit margin (NPM) is 69.7% (as on 30Jun2022) -- OPM
declined for the past two quarters
- its NPM (net profit margin) is between 65% and 71% in the past three years
- its sales growth has decelerated in the past two quarters (FY 2020-21 and 21-22 were high sales growth years for the company)
- its tax rate is between 22% and 24% in the past three years
- its ROCE is between 57% and 63% in the past three years
-- its annualised sales growth is 19% in the past 3 years
- its annualised net profit growth is 24% in the past 3 years
- its dividend payout ratio is b/w 42% and 59% in the past 3 years
- free cash available is Rs 650 crore (out of which Rs 90 crore will be paid as dividend after AGM) as on 30Jun2022
Regulatory Overhang
- CERC (Central Electricity Regulatory Commission) vide its order dt 29Sep22 directed further extension of price cap from 01Oct22 to 31Dec22
- CERC originally put price cap (range of Re 0 / kwh to Rs 12 / kwh) effective from 06May22 to 30Jun22 and later extended the price cap further from 01Jul22 to 30Sep22
- PXIL Circulars - for CERC orders and others
- PIB press release 07Oct2021 - 10-year-long CERC - SEBI turf war on power market resolved by India's Supreme Court: "Both SEBI and CERC have come to an agreement that CERC will regulate all the physical delivery based forward contracts whereas the financial derivatives will be regulated by SEBI. Ministry of power issued suitable order on 10.07.2020.
This has opened the gate for introduction of longer duration delivery-based contracts in the power exchanges which has been currently restricted to only 11 days due to the pendency of the case. This will enable the Discoms and other large consumers to plan their short term power procurement more efficiently. Similarly, the commodity exchanges viz. MCX etc. can now introduce financial products viz. Electricity futures etc. which will enable the Discoms and other large consumers to effectively hedge their risks of power procurement. This is a significant development and has the potential to change the landscape of the power market in the country. This will bring newer products in the power/commodity exchanges and attract increased participation from Genco, Discoms, large consumers etc. which will eventually deepen the power market.
This will further deepen the power market from the present level of approx. 5.5% of the volume to the targeted volume of 25% by 2024-25."
- IEX is regulated by the Central Electricity Regulatory Commission (CERC)
- CERC had been set up by Govt of India under the provisions of the Electricity Regulatory Commission Act, 1998 and is deemed to be constituted as per Electricity Act, 2003, which has repealed the Electricity Regulatory Commission Act, 1998
- CERC is under the ambit of Ministry of Power, Coal and New & Renewable Energy, Govt of India
- power exchanges in India are also guided by the provisions of Govt of India' s Central Electricity Authority (CEA)
To Sum Up
Though the key risks are
regulatory overhang (especially the recent price cap of Rs 12/ kwh on
power exchanges) and growing competition threatening the monopoly of
Indian Energy Exchange Ltd (IEX), at the current market price or CMP of Rs 139, the stock
appears to be attractive for long term investment of three to five years
given its high profitability, big opportunity in power trading in the
next five years, zero debt, clean balance sheet, high cash levels,
possibility of a share buyback by the company, stock's market neglect
and others.
This is just my personal opinion and for information purposes only; this should not be construed as investment advice and investors should consult their own advisors before taking any plunge.
- - -
Abbreviations
DAM - day-ahead market (physical power trading market)
RTM - real time market
DAM and RTM are the same
GDAM - green DAM
TAM - term-ahead market (11 days ahead market)
REC - renewable electricity certificate
ESC - energy saving certificate
GTAM - green term ahead market
References:
Article dated 22Dec2021 - Power Exchanges in India – Overview and Way Forward
by Raveena K Sethia, Shreeyash U Lalit & Aribba Siddique
ICICI Direct 26Jul22
ICICI Direct 29Apr22
ICICI Direct 25Jan22
ICICI Direct 22Oct21
ICICI Direct 16Mar21
17Oct2022: - stock investing - #Corporate #Investing - Know Your Company -
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
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