Maintain ‘buy’ on IEX, target price of Rs 204 – Axis Capital

By: | Published: March 1, 2019 2:05 AM

Discom demand (80% share) continued its strong trajectory (buy bids up 22% YoY) – discoms of Odisha (15%), Bihar (16%), AP (12%), Raj. (13%), Maharashtra, Guj (8%) remained key contributors.

Transaction revenue growth of 17% YoY in 9M was led by (a) 19% rise in day- ahead volume, (b) 53% rise in term ahead market.

IEX’ 9M electricity volume grew 20% as demand by discoms continues to be strong (led by electrification, elections etc.); transaction revenue (90% of top line) grew 17% YoY.

Power exchange in India to benefit from: (1) nascent stage (4% of generation); (2) favourable policy measures by regulator (linking DSM prices to power exchange; (3) discoms sourcing peak-load from spot (vs. PPA) to savecapacity charges; (4) robust renewable growth (infirm, concentrated) to boost liquidity on exchanges – we believe these factors would drive 18% sustainable volume CAGR of IEX in the long run.

Further, ongoing working papers on cross-border trade through exchange, reduction in gate closure, online open-access clearance to increase liquidity on exchange multifold; IEX remains our preferred pick, maintain ‘buy’.

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Discom demand (80% share) continued its strong trajectory (buy bids up 22% YoY) – discoms of Odisha (15%), Bihar (16%), AP (12%), Raj. (13%), Maharashtra, Guj (8%) remained key contributors. Dip in REC volume (78% in Q3; 5% in 9M) was offset by withdrawal of incentives offered earlier (link) with effective transaction margin at Rs 20/REC on both purchase & sale (vs Rs 16/REC charged by only seller, full incentive offered to buyers).

Linking DSM price to exchange price under new amendment (w.e.f Jan’19) to gradually shift 50% of DSM vol. (due to non-technical errors) to exchanges as discoms will no longer have the benefit of lower pricing in DSM – this would drive 25% higher volume on IEX. We trim our FY19/20E EPS by 3%/5% to factor in lower REC volume; retain our electricity volume CAGR of 18% given multiple growth levers and IEX’ dominant leadership; roll forward to FY21E and reiterate ‘buy’ with DCF-based target price of Rs 204.

Transaction revenue growth of 17% YoY in 9M was led by (a) 19% rise in day- ahead volume, (b) 53% rise in term ahead market. Admission and annual fee declined 20% YoY in 9M due to change in mix, as share of price-sensitive open access customers declined to 20% in Q3 (vs. 33% YoY) as average clearing price on exchange rose 21% to Rs 4.3/unit.

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