Indian Energy Exchange Ltd Research Report By IIFL

Indian Energy Exchange (IEX) executed ~97% of total power exchange volumes in FY18. IEX would see trading volumes rise at 14.9% CAGR over FY18-20E due to (1) 5% CAGR in power demand over FY18-20E, and (2) market share of IEX rising from 3.8% (FY18E) to 4.6% (FY20E). Thus, we forecast EPS CAGR of 16.8% over FY18-20E, with IEX maintaining its ROE at 40%+ over FY19-20E. We recommend BUY with target price of `1,956 (33x FY20E EPS).

Increasing preference for short term markets:

Power distribution companies (discoms) are expected to increase sourcing from the short term market. Factors behind this shift are: (1) short prices are lower on average than existing PPAs, (2) variability in power supply due to rise in power generation from renewable sources, and (3)reduced network congestion due to expansion of transmission capacity (refer exhibit 1).

Shift of short term volumes to power exchanges:

IEX would benefit from migration to short term market over FY19-22E. This migration has been due to transparent price discovery on IEX. Due to price discovery mechanisms, differences in inter-regional power prices have reduced by Rs 1.1 per unit over FY14-18 (refer exhibit 4).

Exchanges dominate trading in developed markets:

Power exchanges in India had a market share of 3.8% in FY18E. This is much lower than that in developed countries, where the market share ranges between 30-50%. This highlights the long term growth trajectory for power exchanges, as Indian power markets converge with global standards.

Outlook & Valuation:

We are positive on IEX due to (a) growing share of the short term power market and exchanges, and (b) unique business model with superior return ratios (refer exhibit 6) and negative working capital.

We value the stock at 33x FY20E EPS, which we feel reflects IEX’s long term growth opportunities and its unique business model. Further, strong cash flows would allow for healthy distribution to shareholders via buybacks and dividends.