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Maintain ‘hold’ on IEX with target price of Rs 2,050

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Published: March 23, 2018 3:48:37 AM

We recently interacted with the management of Indian Energy Exchange (IEX). 4QFY18 has started along expected lines with exchange traded volumes up 9% YoY in January-February 2018.

Indian Energy Exchange, term ahead market ,  CAGR, power oversupply, PPA rates, PXIL, dcfManagement highlighted that Uttar Pradesh and West Bengal continue to show robust trading trends on the exchange. Chhattisgarh, Orissa and Jharkhand should see higher contribution going forward.

We recently interacted with the management of Indian Energy Exchange (IEX). 4QFY18 has started along expected lines with exchange traded volumes up 9% YoY in January-February 2018. 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 also market share gains from bilateral traders. Recent correction offers a good buying opportunity.  Indian short-term markets are yet to mature and hence term ahead market (TAM) volumes, ie up to 11 day advance purchases, are just 2% of volumes. 9MFY18 volumes were up 14% YoY. Our FY18 estimates need 4Q volumes to be up 8% YoY, which the current run-rate indicates is comfortably achievable.

Management highlighted that Uttar Pradesh and West Bengal continue to show robust trading trends on the exchange. Chhattisgarh, Orissa and Jharkhand should see higher contribution going forward. States remain dominant at 60%+ of overall trading volumes. Power oversupply position remains with average all-India January-February thermal PLF at 62.5%. We maintain that even if demand growth recovers to an 8% CAGR in the next 3-5 years, from the current 11MFY18 run-rate of 5.2%, oversupply will remain.

This is a plus point for IEX as it implies further growth potential of traded volumes as states prefer lower exchange tariffs vs higher PPA rates. Exchange tariffs briefly touched higher levels of `4.1/unit in Sept-Oct 2017 but have since dropped to Rs 3.24/unit. Management is clear in its vision of gaining share from licensed traders and constantly communicating with key parties involved.

With FY17-20E 14% volume CAGR, 15% 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 FY17-20E and high dividend payout ratio, IEX has kept ROEs north of 40%. We remain positive with a DCF-based PT of `2,050. Risks: 1) regulator dropping margins; 2) competition (PXIL) becoming aggressive.

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