IEX to benefit from rise in short-term traded volumes

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New Delhi | Published: August 30, 2018 2:43:39 AM

Pricing and costs are stable with no incremental noise bytes from CERC on pricing. We believe IEX is in a sweet spot as it benefits from the rise in short-term traded volumes and market share gains from bilateral traders. The FY18 annual report also points to good times continuing.

Pricing and costs are stable with no incremental noise bytes from CERC on pricing. We believe IEX is in a sweet spot as it benefits from the rise in short-term traded volumes and market share gains from bilateral traders. The FY18 annual report also points to good times continuing.

We recently interacted with the management of India Energy Exchange (IEX). FY19 has started on a good note with double digit 15% y-o-y growth in IEX’s traded volumes in 5MFY19.

Pricing and costs are stable with no incremental noise bytes from CERC on pricing. We believe IEX is in a sweet spot as it benefits from the rise in short-term traded volumes and market share gains from bilateral traders. The FY18 annual report also points to good times continuing.

IEX’s annual report discussed its single-minded focus of creating win-win solutions for the client. The company conducted six (West Bengal, Bihar, Rajasthan, Assam, Punjab) capacity building workshops for distribution companies to help them optimise their power procurement, among other initiatives. Management believes strong customer focus will help it take advantage of the rising short-term market in India.

New initiatives such as gas trading exchange are being discussed, but are not yet a focus area. Day ahead volumes (DAM) account for 98% of transaction fees. Indian short-term markets are yet to mature and hence term ahead volumes (TAM) i.e. 11 day advance purchases are just 2% of volumes. In Q1FY19, the buy bids were up 25% y-o-y and sell bids just 1% y-o-y due to coal shortage.

Average clearing prices touched a high of Rs 4.67/unit in May 2018. This dropped to Rs 3.35/unit in August as sell bids rebounded to 16% y-o-y growth when the coal situation improved. Renewable Energy Certificates volumes are also trending higher and will benefit IEX on realisations and volumes.

IEX has a headstart in the power exchange market with experienced and capable management from the power sector. Its strong relations with SEBs have been a driver in convincing them to save costs through exchange purchases. Management is clear in its vision of gaining share from licensed traders and constantly communicating with key parties involved. With FY18-20E 15% volume CAGR, 15% profit CAGR and 40%+ ROEs, we believe it is a good long-term portfolio holding that will offer steady returns.
We remain positive with a DCF-based PT of Rs 2,050.

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