Company Name – Indian Energy Exchange Limited (IEX) Current Share Price – INR 144 (December 20, 2022) Market Cap – INR 12,932 cr |
1. What is interesting about the stock?
You are most likely reading this on a device that has been charged at some point in 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 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, the 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's target is 4x in 3 years) backed by policymakers and regulators. It is witnessing robust traction in all products and is slated to launch new derivative products in the 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 started trading in May 2022. The Ministry of Petroleum & Natural Gas has also granted pricing and marketing freedom to trade on the gas exchanges for up to 10% of their annual production since Aug ’21. This will further increase the trading volumes in IGX. IGX also counts the National Stock Exchange of India (NSE) and ONGC as strategic investors with them holding a 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 ~14% of the total electricity market and is likely to grow shorter, 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 at 36% in FY22 vs FY21 with an increase in the EBITDA margin
However, the revenue has fallen by 13% in Q2FY23 on a YoY basis and revenue has de-grown by ~3% on a QoQ basis. The trend was similar in the last three quarters
Profit also fell in Q2FY23 vs Q2FY22 and Q1FY23
CFO/EBITDA, ROCE, and ROE to has expanded in FY22
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 had increased their stake from 30% to 37% in the Company in TTM ended Sep 30, ’21. FIIs stake has since fallen to 16% as of Sep 30, 2022. Share price has fallen by ~45% in 2022.
For INR 144 per share, the trailing P/E ratio is ~43x, very expensive in any market, especially with a weak set of numbers in the last few quarters. 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. Investors could evaluate accumulating the stock below a P/E multiple of ~30x, or a ~30% 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 like HPX (owned by PTC, BSE, and ICICI Bank) 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 an MBA from a premier institute in India.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the 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 purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.