IEX has a BUY rating with a target price of Rs 435: ICICI Direct

Robust performance…

IEX reported robust Q4FY21 numbers that were a beat on our estimates on all parameters. Strong power demand led by a swift recovery in the economy aided volumes, which came in at 22451 MUs in Q4FY21, up 62.3% YoY & 11.3% QoQ. Further, balance sheet continues to remain top notch aided by strong liquidity and debt free position. Revenue for the quarter came in at | 93.8 crore, up 35.1% YoY & 10.1% QoQ (vs. I-direct estimate of | 89.8 crore). The gas exchange, which is still at a very nascent stage, registered an EBIT loss of | 3.86 crore vs. a loss of | 1.5 crore during previous year. Ensuing PAT came in at | 60.9 crore, up 33.4% YoY & 4.7% QoQ. Tax rate for the quarter was at 23.8%.

Volumes to grow in double digit in medium term

With increase in share of trading of electricity in exchanges from 4.4% in FY20 to 6% in FY21 has benefited the IEX in a big way. Given IEX commands very high market share across all products in duopoly markets, volumes for FY21 grew 37% YoY to 73.9 billion units (BUs). Apart from rising share of exchanges in power consumption, IEX has been at the forefront of introducing new products on its platforms that have resulted in such high volume growth for the company. The company has launched real time market (RTM) product, which has witnessed strong response and volumes. Also, introduction of green term ahead market (GTAM) and cross border trades in H1FY21 will continue to show strong accretion in volumes, going ahead. Going into FY22, IEX is planning to launch new products, which may go live by H2FY22. This includes long duration electricity trading (365 days) and integrated green electricity market coupled with continued traction of FY21 products would ensure a volume CAGR of 18% in FY21-23E. Our volume projections do not include traction that will come about in the gas exchange market. As of now, IEX has diluted 46-47% stake in the gas exchange. Now the company has enough time on hand to dilute the stake at higher levels to create value for shareholders.

Pristine balance sheet coupled with robust payout ratio…

During FY21, IEX generated strong CFO to the tune of Rs 306.3 crore vs. Rs 126.01 crore in FY20. The company ended the year with a cash balance of Rs 46 crore and other bank balance at Rs 57.82 crore. Total investments were at Rs 712.81 crore. Going ahead, the management expects to maintain its payout of 50%.

Valuation & Outlook

We still believe power traded through exchange is under penetrated in India and has a long way to go thereby creating humongous growth opportunity for companies like IEX that has been quite consistent in introducing new and innovative products to garner the upcoming opportunity. We maintain our BUY rating on the stock with a target price of Rs 435 (earlier Rs 430).