Updated: Jun 9
Company Name – Indian Energy Exchange Limited (IEX)
Current Share Price – INR 219 (April 27, 2022)
Market Cap – INR 19,663 cr
[Updated for Q4FY22/FY22 results]
1. What is interesting about the stock?
You are most-likely reading this on a device which has been charged at some point of time. And when you look around you, you see an explosion of electrical devices around you. There is a high likelihood that the electricity company selling the electricity you are consuming has bought it off the electronic platform run by IEX, the pioneer platform for trading of electricity products. It has a 90+% share of electricity trading in the country across all timeframes. And its subsidiary, Indian Gas Exchange Limited (IGX) takes care of gas trading.
As the share of renewable energy increases, trading of electricity would also go up significantly. Given the uncertainty due to dependence on nature, renewable energy producers would prefer to sell in the open market with shorter duration contracts like those traded on IEX. This is leading to a structural deepening of the spot power market (Govt. of India target is 4x in 3 years) backed by policy makers and regulators. It is witnessing robust traction in all products and is slated to launch new derivatives products in next few months, which is likely to increase the market size that IEX targets by another 50 billion units (against an existing short-term market of ~120 BUs).
As IEX has an almost monopolistic share of the trading market, it is set to benefit the most from the explosion in this market. This is also reflected in excellent financial metrics (3 years' net profit margin of ~70%, RoE of ~50%, negative working capital requirements and ~85% of operating profits for the last 4 quarters).
The Indian Gas Exchange, the first gas exchange in India has started trading in the last 4 months. The Ministry of Petroleum & Natural Gas has also granted pricing and marketing freedom to trade on the gas exchanges up to 10% of their annual production since Aug ’21. This will further increase the trading volumes in IGX. IGX also counts National Stock Exchange of India (NSE) and ONGC as strategic investors with them holding 26% stake in the company.
Why invest in IEX?
The key investment arguments summarized would be:
90+% market share in a fast-growing short-term power market
Short term power trading market is ~11% of the total electricity market and likely to grow to 13% in the next couple of years, and is actively moving from bilateral contracts and unscheduled interchanges to trading platforms
Experienced management team
Excellent financial metrics
2. Key Historical Financials
Revenue growth has been solid of 36% on in FY22 vs FY21 with increase in EBITDA margin
CFO/EBITDA, ROCE and ROE too has expanded in FY22
However, the growth is coming down in last few quarters with revenue growth of 19% (YoY) in Q4FY22 and volume growth of 16% (YoY) in the month of March
Revenue and EBITDA have come down in Q4FY22 vs Q3FY22 which also point in the same direction
3. What is my view on company valuation?
The stock price of the Company ran up significantly in 2020 and 2021 on the back of increasing interest from FIIs who have increased their stake from 30% to 37% in the Company in TTM ended Sep 30, ’21. Share price has been flat or a bit down in 2022 and the FII have decreased their stake to 27%.
At a price of INR 219 per share, the trailing P/E ratio is ~65x, very expensive in any market. While the business is excellent and the fundamentals are likely to catch up in the next couple of years, this stock is good to be accumulated at dips for the long run. Investor could evaluate accumulating the stock below P/E multiple of ~40x, or a ~33% discount from its current price.
4. What are the risks to the investment analysis?
Risks to the analysis are:
The other competitor, Power Exchange of India (PXIL) becomes more aggressive and takes away market share from IEX. New competitors emerge and grow to counter the network effects that IEX benefits from
Regulatory changes reduce the amount of commission that the exchange can make
About the Author
I have over 16 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.