CERC order removes pricing overhang; stock is a good long-term holding; ‘Buy’ retained with TP of Rs 2,050.
We interacted with the management of Indian Energy Exchange. Q2FY19 saw double-digit volume growth of 18% y-o-y, continuing the good note the year began on. CERC passed an order last week that only pricing changes by IEX need its approval. This has put to rest concerns over the regulator governing, and reducing, the rates. We maintain IEX is in a sweet spot as it benefits from volume growth on a stable pricing and cost base. Buy
CERC order sets tone for stable pricing
Consensus and our estimates factor current pricing being stable with no rise expected. The order has removed the overhang that pricing might be reduced.
October DAM volumes to date rise 69%
Erratic rains impacting hydropower generation, coupled with higher residential and agricultural demand due to soaring temperatures especially in Delhi, Mumbai and Central India, have led to a sharp volume rise for IEX in October. Management indicated this is likely to settle down in November-December as temperatures cool off. In Q2FY19, DAM volumes were up 18% with buy bids up 15% y-o-y and sell bids up 25% y-o-y. Average clearing prices touched a high of `4.69/unit in September. This further increased in October with the average clearing price for the first 14 days at `6.78/unit. Renewable Energy Certificates (REC) volumes are also trending higher and 3,112 RECs were traded in Q2FY19, which was up 314% y-o-y.
Lock-in for 62% share capital expired on 17 October, 2018
Mandatory lock-in for investors pre-IPO ended on 17 October, 2018. Management is clear in its vision of gaining share from licensed traders and constantly communicating with key parties for increasing volumes. With FY18-21e 17% volume CAGR, 16% profit CAGR and 40% ROEs, we believe it is a good long-term portfolio holding that will offer steady returns.
Between double-digit earnings CAGR in FY18-21e and a high dividend payout ratio, IEX has kept ROEs north of 40%. We remain positive with a DCF-based PT of `2,050. Risks: competition (PXIL) becoming aggressive.