Updated: Apr 14, 2022
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You’re watching this video on a device that, at some point in time, needed to be charged, or plugged into a switch. We all rely heavily on electricity in our daily lives. There’s a high chance that your electricity supplier has bought electricity from the electricity platform of IEX. IEX is the single largest entity in the electricity trade market with a market share of 90%.
The industry has seen growth, with a significant rise in renewable energy industry. Given the dependence of Renewable energy on nature, producers of such energy sell in the open markets on shorter duration contracts, like the ones on IEX. The markets which IEX sets to target is also set to increase by some 50 billion units to around 170 billion units in 2022.
Since IEX is a monopoly, the growth of the spot power market is especially beneficial to them. Their financial metrics are proof of just that, with a Return on Equity of almost 50%.
The Indian Gas Exchange, a subsidiary of IEX, the first of its kind in India, is also likely to grow very fast. The gas companies have been given pricing and marketing freedom from the Ministry of Petroleum & Natural Gas, to trade on the gas exchange up to 10% of their annual production.
So, is investing in IEX a good option? To put it simply, the company owns the controlling share of a very fast growing market, thus investing in it makes a lot of sense. The short term power trading market is around 11% of the electricity market, and could grow into 13% in the near future. And with an excellent management team, and overly positive metrics, there’s no reason not to invest in IEX.
So what are our views on the company valuation? A Price to Earnings ratio of around 90 times is not cheap by any means. And while business is good, and fundamentals are likely to catch up, this stock may be accumulated at dips in the long run. Accumulating this stock at a PE ratio of 50-55 times is a fairly good choice.
The stock price has risen significantly in recent quarters on the back of growing interest from Foreign Institutional Investors. The FIIs have increased their stake in the company too.
So, what are the risks to this analysis?
The risk exists in the form of competitors, most notably Power Exchange of India, which has opted for a much aggressive approach, and are taking away market share from IEX. IEX greatly benefits from its monopoly status and network effects, and the emergence of competitors puts it at risk. Moreover, changes in regulations can reduce the commissions that the exchange can make thereby impacting its financial metrics.
Would you invest in IEX?
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