Stock Fundamentals

Why you should book profit in Indian Energy Exchange stock

Maulik Madhu BL Research Bureau | Updated on June 19, 2021

After a fantastic run over the past year, the stock at current level of ₹378 leaves nothing on the table

Indian Energy Exchange (IEX), the market leading energy exchange, holds the lion’s share of India’s short-term (ST) power trading market.

Shrugging of the tepid performance in the earlier part of the year on account of the nationwide lockdown, IEX delivered its strongest performance in FY21. Mirroring the company’s strong showing, the IEX stock surged - nearly trebling from ₹130 per share in March 2020 to ₹379 driving up valuations. Despite the company’s strong financial performance and prospects, investors can book profit in IEX. After the past year’s run-up, the stock more than adequately prices in the company’s expected earnings growth.

About the business

The bulk of the country’s electricity (89 per cent) is largely purchased by state power distribution utilities (discoms) under long-term power purchase agreements (PPAs). The ST power market which comprises contracts of less than a year, accounts for around 11 per cent of India’s electricity generation. Fifty per cent of these ST trades happen via power exchanges, a segment dominated by IEX. These exchanges enable discoms and other bulk customers to buy power at competitive rates, typically lower than those for purchases off the exchange.

IEX accounts for 95 per cent of India’s exchange-traded power volumes. Power Exchange India (unlisted), the other power exchange accounts for the rest. Fifty per cent of India’s ST power trades happen via these exchanges. Apart from that, ST power trades also take place through inter-state traders such as PTC India, Adani Enterprises and GMR Energy Trading, and between the discoms directly.

IEX brings together power sellers such as independent power producers, captive power plants and discoms and buyers such as discoms and industrial and commercial consumers on an automated trading platform for transparent price discovery for physical delivery of electricity.

IEX operates in six different market segments including one each for trading in Renewable Energy Certificates and in Energy Saving Certificates. The exchange’s day-ahead market facilitates buying and selling of electricity for next day deliveries. The term-ahead market facilitates this for different terms for a period of up to eleven days ahead. The real-time market (RTM) which commenced operations in June 2020, allows trading in power for deliveries within an hour. The green term-ahead market (GTAM) launched in August 2020 facilitates trades in renewable energy.

A large part of IEX’s revenue comes from transaction fee which is charged based on the volume of transactions conducted on the exchange. An increasing volume of electricity trades on the exchange, therefore, holds the key to revenue growth. As the short-term power market expands, power exchanges especially IEX, are well-positioned to capture a share of this pie.

This will come by as more discoms resort to buying more power on the exchanges instead of solely depending on the costlier power contracted under long-term PPAs. While IEX is preparing to launch two new segments, long duration delivery contracts and the integrated green day-ahead market, these are yet to be approved by the sector regulator .

Though not a near-term threat, investors much watch out for competition from a new power exchange by Pranurja Solutions (backed by PTC India, BSE and ICICI Bank) .

Financial performance

The volume of short-term power trades in India has grown from 115 BU in FY16 to around 140 BU by FY21 (until January). Over the years, the volume of electricity traded on IEX too has risen steadily – from 34 BU in FY16 to 74 BU in FY21. In line with this IEX’s revenue from operations grew at 12.7 per cent CAGR over the last five-year period to reach ₹318 crore by FY21. Backed by lower operating costs, IEX expanded its operating profit at 14 per cent CAGR to ₹234 crore and net profit at 15.4 per cent CAGR to ₹206 crore during this five year-period. This was aided by the impressive show by IEX in FY21. It posted operational revenue growth of 23.6 per cent, operating profit growth of 25.3 per cent and net profit growth of 17.3 per cent in FY21 compared to FY20. Growing consumption of electricity as economic activity picked up, competitive prices on the exchange and the launch of RTM and GTAM drove IEX’s performance

Valuations trump growth

Notwithstanding IEX’s recent financial performance and the scope for future growth, investors could exercise some caution. After the rally, at ₹379, the stock trades at a trailing 12-month P/E of 55 times. This is significantly higher than its 3-year historical average P/E multiple of 33.5 times. Even assuming an earnings growth of 24 per cent and 16.5 per cent in FY22 and FY23 (Bloomberg consensus estimates) respectively, the one-year forward P/E multiple comes to a steep 43 times.

Published on June 19, 2021

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