Indian Energy Exchange (IEX)

My thoughts on the 3rd Exchange- HPX and the whole narrative around IEX losing its monopoly and margins pressure.

The 3rd power exchange- HPX, promoted by PTC, BSE and ICICI Bank went live on 6th of July. The launch of this exchange has been something that has been talked about a lot with the context that it will reduce IEX’s monopoly and also put pressure on IEX’s transaction fees & thus margins.

HPX has started its operations with two contracts in the TAM segment- Day Ahead Contingency and Green Term Ahead Market.

In these first 20 days, HPX has had zero volumes in G-TAM segment and ~202 million units in DAC contract. Based on these volumes, HPX has taken ~25% market share within the DAC contract. This coupled with the fact that IEX’s volume for the month of July are down (y-o-y), some segment of market is viewing this as signs of pressure on IEX’s market share.

However, our take is different here-

1. DAC as a segment is a very small part of overall exchange market. It is a part of TAM segment along with other contracts like Intra-day, Daily and Weekly Contracts. Historically, TAM as a segment has contributed about ~5-7% of IEX’s overall volume.

2. TAM as a segment is not driven by liquidity. (Snippet from Q3FY20 Concall)

   

   And because of this nature of this segment, historically as well, IEX never had 100% market share in this segment like it does in major segments of DAM and RTM, both of which are liquidity driven and contributes >80% of IEX’s volumes. PXIL (2nd exchange) historically has survived on this segment (>90% of PXIL’s volumes) and has had good market share in TAM segment.

   

   So, HPX has basically taken some market share in a segment which is very small part of IEX’s volume and is not wherein IEX had monopoly.

3. Further, HPX in its 1st month is not charging any transaction fee and will be offering some 20% discounts for next 1-2 months. So, these volumes have been accumulated on the back of non-sustainable pricing.
   We had asked IEX’s management in the concall whether historically such discounts on transaction fee have had any impact on shift in volumes. Management said that there have been multiple times in the past when PXIL had tried to restart its DAM segment by offering lower fees, but it never worked. As per the management, more than pricing, the end customer is more worried about trade execution, price discovery and ease of use.

4. Also, a lot of people are worried that PTC which contributes large volumes to IEX will shift its volumes to HPX as it has 26% stake in HPX. However, as per regulations, till the time PTC owns >5% stake in HPX, it cannot trade on HPX. And at 5% stake, there is no real value for PTC to shift its volumes.

5. Lastly, on the volumes being down (y-o-y) for IEX; launch of HPX has got nothing to do with it. It is again largely because of the supply side issues that have continued.

So based on all the above and our understanding of the business, we believe the narrative that IEX’s will lose its monopoly or will face pressure on its fees does not has any merit.

Disclosure: I am a SEBI Registered Research Analyst. I own IEX and have an active recommendation on the same. Above is a part of my quarterly update to clients on IEX.