India Equity Research Power March 5, 2021
INDIAN ENERGY EXCHANGE
COMPANY UPDATE
KEY DATA Rating BUY Raising the energy bar Sector relative Outperformer Price (INR) 304 12 month price target (INR) 345 At its annual analyst meet, IEX’s management exuded confidence Market cap (INR bn/USD bn) 92/1.3 about growth prospects powered by strong demand, enhanced Free float/Foreign ownership (%) 100.0/30.2 What’s Changed merchant capacity base, new products and favourable regulatory Target Price Rating/Risk Rating ⚊ changes. Besides, IGX is awaiting critical enablers to lift volumes meaningfully, not to mention new Coal Exchange being under INVESTMENT METRICS 50 consideration. Furthermore, management is focusing on taking 40 customer experience to a new level via an intelligent digital mesh. 30 20 Given its near monopoly, IEX is a big beneficiary of changing dynamics 10 0 in the short-term power market apart from the benefits of new Sales Growth EPS Growth RoE PE (%) (%) (%) (x) exchanges. We factor these in through higher terminal growth (up Power IEX IN EQUITY 130bps). Retain ‘BUY’ with a revised TP of INR345 (earlier INR270).
FINANCIALS (INR mn) Trend changes, regulatory reforms, new products to drive volumes Year to March FY20A FY21E FY22E FY23E Management expects a likely uptick in industrial power demand and 40% surge in Revenue 2,571 3,054 3,733 4,341 per capita power consumption over the next four years to drive robust power EBITDA 2,022 2,392 2,978 3,502 Adjusted profit 1,757 1,988 2,403 2,803 demand. They expect 100BUs of an additional exchange volumes opportunity from Diluted EPS (INR) 5.9 6.7 8.1 9.4 phasing out of 41GW capacities (current merchant capacity: 20GW). This apart from EPS growth (%) 7.8 13.2 20.9 16.6 the launch of new products such as LDC, CBT, GDAM and derivatives market should RoAE (%) 46.4 46.7 46.4 44.2 power up exchange volumes. Diversification through IGX and a possible new coal P/E (x) 51.6 46.1 38.1 32.7 exchange are also potential new avenues for growth. Management is also optimistic EV/EBITDA (x) 32.8 27.3 21.5 17.8 Dividend yield (%) 0.8 1.3 1.4 1.7 about regulatory reforms such as the draft Electricity Amendment Bill 2021 and PMR regulations shifting the volumes to exchanges.
PRICE PERFORMANCE Customer experience, technology disruption key differentiators
325 53,000 Customer delight and technology transformation via implementation of an 280 47,400 intelligent digital mesh are likely to be the key differentiators for IEX. This should 235 41,800 deepen customer loyalty and keep it ahead of rivals, if any. IEX’s clear focus is on 190 36,200 providing quick and agile IT systems to provide customer-centric solutions. It is 145 30,600 100 25,000 channelising efforts to provide a web-based integrated portal, improve algorithms, Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 created an integrated bid pipeline, and move from a disparate to intuitive system. IEX IN EQUITY Sensex
Outlook and valuation: Structural drivers lend edge; maintain ‘BUY’ Explore: Our key investment rationale (read IC report) that IEX would be a big beneficiary of the deepening spot power market is playing out well and slightly ahead of time. Trend changes (read Spot market on a roll) and innovative launches reinforce our confidence on the company delivering an 18% EPS CAGR over FY21–23, conservatively speaking. Furthermore, in our view, the new (rival) exchange is Financial model Podcast unlikely to have any meaningful impact on IEX’s volumes in the near to medium term.
We are raising FY23E EPS by 4% as IEX’s horizontal and vertical diversification is gaining heft and also visible in its volume growth (30% ex-REC in 11mFY21). IGX and a potential coal exchange imply strong growth opportunities over medium to long Corporate access Video term, and we factor it in through higher terminal growth of 7%, which yields a revised TP of INR345 (exit PE 36x). Maintain ‘BUY/SO’ and preferred pick status on IEX.
Swarnim Maheshwari +91 (22) 4040 7418 [email protected]
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INDIAN ENERGY EXCHANGE
Financial Statements
Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 2,571 3,054 3,733 4,341 Share capital 298 298 298 298 Energy Cost 0 0 0 0 Reserves 3,581 4,337 5,418 6,680 Employee costs 332 427 475 514 Shareholders funds 3,880 4,635 5,717 6,978 Other expenses 217 235 280 326 Minority interest 0 0 0 0 EBITDA 2,022 2,392 2,978 3,502 Borrowings 0 0 0 0 Depreciation 152 166 173 179 Trade payables 766 1,004 1,227 1,427 Less: Interest expense 16 20 21 22 Other liabs & prov 1,832 1,912 1,995 2,083 Add: Other income 403 416 428 447 Total liabilities 6,673 7,756 9,154 10,714 Profit before tax 2,256 2,623 3,213 3,748 Net block 213 185 156 128 Prov for tax 499 635 810 944 Intangible assets 1,015 1,028 1,034 983 Less: Other adj 0 0 0 0 Capital WIP 0 0 0 0 Reported profit 1,757 1,988 2,403 2,803 Total fixed assets 1,228 1,212 1,190 1,111 Less: Excp.item (net) 0 0 0 0 Non current inv 1,967 1,967 1,967 1,967 Adjusted profit 1,757 1,988 2,403 2,803 Cash/cash equivalent 3,395 4,462 5,860 7,472 Diluted shares o/s 298 298 298 298 Sundry debtors 2 17 20 24 Adjusted diluted EPS 5.9 6.7 8.1 9.4 Loans & advances 25 31 37 44 DPS (INR) 2.5 4.1 4.4 5.2 Other assets 55 66 79 95 Tax rate (%) 22.1 24.2 25.2 25.2 Total assets 6,673 7,756 9,154 10,714
Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Operation cost (% of rev) 0 0 0 0 Reported profit 1,757 1,988 2,403 2,803 Employee cost (% of rev) 12.9 14.0 12.7 11.8 Add: Depreciation 152 166 173 179 Other exp (% of rev) 8.5 7.7 7.5 7.5 Interest (net of tax) 12 15 16 16 EBITDA margin (%) 78.6 78.3 79.8 80.7 Others (380) (412) (423) (441) Net profit margin (%) 68.3 65.1 64.4 64.6 Less: Changes in WC (282) 297 294 272 Revenue growth (% YoY) 1.2 18.8 22.2 16.3 Operating cash flow 1,260 2,054 2,462 2,829 EBITDA growth (% YoY) (0.3) 18.3 24.5 17.6 Less: Capex (78) (150) (150) (100) Adj. profit growth (%) 6.5 13.2 20.9 16.6 Free cash flow 1,182 1,904 2,312 2,729
Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 3.0 6.0 6.0 RoE (%) 46.4 46.7 46.4 44.2 Repo rate (%) 4.4 3.0 4.0 4.0 RoCE (%) 59.9 62.1 62.5 59.4 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days nm nm nm nm DAM (bu's) 49.1 57.4 61.4 65.7 Receivable days 33 1 2 2 TAM (bu's) 7.2 7.7 8.2 8.6 Payable days nm nm nm nm Exchange (bu's) 56.3 73.8 86.7 100.3 Working cap (% sales) (88.3) (83.8) (76.1) (71.5) RTM (bu's) 22.6 21.1 15.2 10.9 Gross debt/equity (x) 0 0 0 0 Bilateral (bu's) 58.3 37.4 40.7 40.2 Net debt/equity (x) (0.9) (1.0) (1.0) (1.1) Trans fee (paisa/unit) 4.1 4.0 4.0 4.0 Interest coverage (x) 119.4 111.3 133.6 151.0
Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 51.6 46.1 38.1 32.7 EPS growth (%) 7.8 13.2 20.9 16.6 Price/BV (x) 23.4 19.8 16.0 13.1 RoE (%) 46.4 46.7 46.4 44.2 EV/EBITDA (x) 32.8 27.3 21.5 17.8 EBITDA growth (%) (0.3) 18.3 24.5 17.6 Dividend yield (%) 0.8 1.3 1.4 1.7 Payout ratio (%) 42.4 62.0 55.0 55.0
Source: Company and Edelweiss estimates
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INDIAN ENERGY EXCHANGE
Exchanges outpaced short-term market by 3x Volume mix changing with launch of new products
150 8,000
Short term market Power exchange 6,400 120
4,800
90 MU
3,200 BU 60 1,600
30 0
CAGR - 5.6% CAGR - 17.4%
July
May June
0 April
August
January
October
February December November STM FY15 STM FY21 Exchange FY15 Exchange FY21 September DAM TAM RTM GTAM
Source: Company, Edelweiss Research Source: Company, Edelweiss Research
Technology in transformation will lead to…
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INDIAN ENERGY EXCHANGE
….deepening dustomer loyalty
Source: Company, Edelweiss Research
Global comparison
Mcap Revenue EBITDA PAT RoE (%) P/E (x) Company USD mn FY21 FY22 FY23 FY21 FY22 FY23 FY21 FY22 FY23 FY21 FY22 FY23 FY21 FY22 FY23 IEX 1,283 3,028 3,611 4,005 2,427 2,947 3,289 1,966 2,416 2,724 45.6 44.8 41.8 47.2 39.0 32.7 MCX 1,060 4,279 4,963 5,959 2,201 2,640 3,402 2,399 2,676 3,246 16.3 17.3 19.5 32.1 29.1 24.3 BSE Limited 364 4,739 5,384 6,231 785 1,066 1,797 1,573 1,761 2,163 6.3 7.1 8.6 17.3 15.4 12.3 HKEX 78,316 18,965 23,584 26,574 14,479 18,905 21,470 11,387 15,079 17,227 24.6 29.8 32.1 53.5 41.2 36.2 Japan Exchange 12,046 1,23,170 1,29,416 1,36,138 79,474 87,027 94,117 47,345 48,605 52,094 15.8 14.8 15.3 27.5 26.8 25.0 ASX Ltd 10,259 924 948 982 692 688 708 502 478 484 13.1 12.8 12.9 26.4 27.7 27.5 Singapore Exch 7,986 1,024 1,073 1,108 626 635 664 455 460 473 39.5 35.6 33.0 23.5 23.4 22.7 Bursa Malaysia 1,800 742 708 667 501 449 407 360 331 294 46.0 36.5 32.9 20.2 22.7 25.1 NZX Ltd 390 76 81 87 34 36 39 17 18 21 26.3 27.1 30.7 31.6 30.6 26.5 Nasdaq Inc 22,742 2,864 3,132 3,309 1,557 1,676 1,772 1,007 1,054 1,142 17.0 16.1 17.0 22.8 21.8 20.2 B3 SA 20,153 8,018 8,717 9,357 6,409 6,816 7,315 4,451 4,779 5,153 17.8 19.7 21.2 25.3 24.0 22.2 Cme Group Inc 74,327 4,883 4,848 5,120 3,215 3,217 3,507 2,402 2,390 2,585 8.7 8.6 9.5 30.8 31.0 28.6 Cboe Global Mark 10,530 1,380 1,342 1,374 876 837 859 578 542 556 17.2 15.5 18.5 18.6 19.3 18.4 Source: Bloomberg, Edelweiss Research
DCF value of IEX
Particulars (INR mn) Particulars % PV of Cash Flows over FY22-30E 21,089 Cost of Equity (Beta @ 0.9) 11.4 Terminal Value 75,850 Debt/Equity 0.0 Total Value of firm 96,939 WACC 12.0 Add: Net Cash (Sep 2020) 5,892 Tax rate 24.2 Total Equity Value 1,02,832 Terminal Growth rate 7.0 No. Of O/S shares (mn) 298 Value Per Share (INR /Share) 345 Source: Edelweiss Research
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INDIAN ENERGY EXCHANGE
Analyst meet key takeaways Opening remarks India is world’s third-largest energy consumer. Coming years to see good demand led by economic activities, hence expect double-digit growth in power consumption over the next financial year.
376GW installed capacity currently, which is more than demand, making India a power-surplus nation.
INR3 trillion budget outlay for power distribution to further aid the sector.
The company is working on data analytics, automation to create customer delight as well as derive insights.
Last year was a milestone due to the launch of new segments.
INR7.5 trillion oil & gas infra spend will help lift the share of natural gas from currently 6% to 15% by 2030 in the energy basket.
Government committed to bring gas under GST.
The company is working on setting up a coal exchange as a diversification opportunity, and also launching long duration contract for electricity and green day ahead market for renewables.
Business performance Revenue CAGR 25% over last ten years with PAT/EBITDA/EPS CAGR at 28%/28%/27%.
Debt-free since inception while generating operating cash profits and distributing dividend to shareholders.
Seeing greater focus on renewable energy.
Touched peak demand of 190GW in January; can cross 215GW in the coming summer. Ample capacity available today.
11–12% size of short-term market growing at 5.6% with power exchanges volume growing 17.4%.
81% transactions through the day-ahead market. GTAM has done 740mn units since its launch.
Top five buyers make up 50–55% of the real time market; they are from J&K, Telangana, Rajasthan, AP and West Bengal.
Growth potential due to 100% electrification via the SAUBHAGYA scheme, increase in per capita electricity consumption by ~40% over the next four years, phasing out of capacity, reduction in e-auction premium of coal premium to 5% compared with 32% previously.
Efficient price discovery due to better participation.
Launches in the form of longer duration contracts, cross-border trading (expected to start in the next few months), green day ahead, derivatives and other opportunities in the energy basket.
Price discovery on the IEX has been better than the bilateral market.
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INDIAN ENERGY EXCHANGE
Regulatory updates On cross-border trade of electricity: CEA has recently allowed Entities from neighbouring countries (Nepal, Bangladesh, and Bhutan) to participate in DAM and TAM. Approximately 2.5GW of cross border transactions in FY21, and they are projected to increase to 17.5GW in five years.
The CERC Power Market Regulations 2021 issued on 15 February 2021: The CERC stipulated transactions fees of 2p on either side (subject to regulatory approval). Introduction of TAM contracts beyond 11 days. Flexibility in introduction of new bid types without prior approval.
CERC ISTS Charges Sharing Regulations 2020 made effective 29 February 2020: The policy with respect to Sharing ISTS Charges and Losses Regulations 2020 will help increase discom participation on exchanges due to increased opportunity for sale of URS power by discoms. Discoms are exempt from the applicability of transmission charges for participation in the short-term market.
The Ministry of Power’s draft proposal allowing discoms to exit PPA after completion of 25 years will help increase supply liquidity. Approximately. 20GW of CGS have completed 25 years.
Renewable/Hydro purchase obligations – Inclusion of HPO targets, which will add another segment on the exchange.
Regulatory jurisdiction of CERC and SEBI on electricity derivatives.
MoP Draft Electricity (Amendment) Bill 2021 – Multiple distribution.
Customer experience transformation Working on building web- and mobile based platform for better access to market level data applicable to members, clients and key stakeholders in the power sector.
Bid detail – Personalized and deep data insights for effective decision making. Includes bid details, DSM & RTM comparison, demand, weather, generation, and transmission lines outage.
Bid upload automation through APIs, and through auto flow of un-cleared bids across market segments.
Extending all product segment to APIs.
Digital/paperless processes – Online registration and updates, NOAR integration.
Robust business continuity through seamless DC to DR switch.
Technology Initiatives Digital experience through secure web and mobile access, and integration of bids across segments.
Security and seamless uptime.
Automation – Real-time reporting, alerts/notifications as well as SAP integration.
State-of-the-art data insights – Bid data analytics, power market data analytics.
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INDIAN ENERGY EXCHANGE
Indian Gas Exchange Currently, 15 members and 500+ clients already registered on IGX.
Adani Gas, Torrent Gas and GAIL acquired a 5% stake each. There can be three– four more strategic investors in the future.
Three physical trading hubs at Dahej, Hazira and the KG basin.
Five contracts currently (daily/weekly/weekday/fortnightly/monthly) with day- ahead in the planning stage.
INR contracts with a lot size of 100MMBTU/day.
New hubs planned at Dabhol/Jaigarh and in West Bengal.
Government commitment to reduce carbon emissions will promote use of natural gas.
Presently only ~22MTPA LNG regasification capacity utilised out of ~40MMTPA in total. Another 30MMTPA is planned.
Existing pipeline capacity of 18,000km will be doubled over the next two years.
Other comments Competition will usher in greater efficiency in the market. Not much concerned about competition. The focus is on improving customer experience.
Will be able to maintain current market share in the longer duration segment as well.
Capex for technology upgradation.
PLF for merchant 20GW is 50%, and there is an opportunity to ramp up.
REC order expected in May and trading can start after that.
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INDIAN ENERGY EXCHANGE
Company Description Indian Energy Exchange (IEX) is the first and largest energy exchange in India providing a nationwide, automated trading platform for physical delivery of electricity, Renewable Energy Certificates and Energy Saving Certificates. The exchange platform enables efficient price discovery and increases the accessibility and transparency of the power market in India. Today, more than 6600 participants are registered on IEX from 29 States, 5 Union Territories (UTs). Out of participants registered to trade electricity contacts include 56 distribution companies, over 500 electricity generators and over 4,200 open access consumers. The DAM constitutes the substantial majority of the energy contracts that are traded on IEX. In FY18, FY19 and FY20, IEX commanded an average 99% market share, respectively, of electricity contracts in DAM, in terms of volume, according to the CERC. IEX commenced the trading of energy saving certificates on 26 September, 2017. IEX also launched Real time market (“RTM”) from 1st June 2020 and Green TAM in Sep 2020. Recently, it floated a 100% subsidiary Indian Gas exchange (IGX) and officially launched India’s first gas exchange for physical delivery of gas. Investment Theme Spot power market is gaining traction: The transition to short-term market (particularly via exchanges) is due to quickly evolving industry dynamics: abundant supply of power, thrust on renewables, low transmission congestion, cost rationalisation by discoms, etc. We expect the spot market share to improve to 55%/6.7% by FY23 of short term/conventional market. Widening product profile to double IEX’s target market opportunity: IEX derives 78% of its revenues from DAM and 7% from TAM. With the launch of RTM, Green TAM and LDC (to be launched soon), IEX‘s market opportunity has broadly doubled to 110 BU’s. Network and technology effects: IEX’s bulwark of barriers: IEX has since asserted dominance by erecting strategic or artificial barriers to entry via: i) Network effect: A pull strategy to bring in more participants (50% CAGR since inception), which in turn creates ample liquidity and improves price discovery—a virtuous cycle; and ii) Technology effect: By employing a scalable and capable technology platform, IEX has been integrating cutting-edge offerings that yield efficiencies for all stakeholders. Moreover, with the vertical diversification through Gas exchange (IGX), provides IEX INR5-6bn new market opportunity to grow. Key Risks Regulatory changes: Currently, IEX charges 4 paisa/kWh, but if the regulator tinkers around with the trading margin regulations or reduces the margins, it would impact our EPS estimates significantly. Volatility in power demand and prices: It is observed that maximum volumes are traded in a price band of INR2.5–INR2.9/kWh. External factors can impact the power demand-supply equilibrium, thereby impacting spot prices. Higher exchange prices could impact the buyer’s decision (higher offtake through long-term PPAs) and lower exchange prices could impact sellers’ decision (potentially impacting generators marginal cost). This could eat into the IEX’s volumes. New exchange to the trading floor: Regulatory proceedings/compliances for a proposed third exchange by a consortium of PTC, BSE and ICICI Bank are underway. This would pose a medium-to-long term risk to IEX as PTC India accounts for 20% of IEX’s volume as a member. Market coupling is an unchartered territory: In recent draft Power market regulations 2020, CERC has talked about market coupling in which buyer/seller of one exchange can transact on other exchange. If implemented, this could impact IEX’s volumes.
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INDIAN ENERGY EXCHANGE
Additional Data Management Holdings – Top 10* Non Executive Chairman Satyanarayan Goel % Holding % Holding DALMIA POWER LT 10.02 FMR LLC 5.07 CFO & CS Vineet Harlalka TVS SHRIRAM GRO 10.02 Ward Ferry Mana 4.95 CTO Sangh Suman Gautam Mirae Asset Glo 7.41 RIMCO MAURITIUS 4.55 Dir (Strategy & Reg) Rajesh K Mediratta Capital Group C 6.19 RURAL ELECTRIFI 4.10 Auditor B S R & Associates LLP Reliance Capita 5.18 IIFL SPECIAL OP 2.73
*Latest public data
Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Growth juggernaut rolls on ; January: Demand firming up north 09-Feb-21 273 Buy 25-Feb-21 Power Company Update of 5% ; Sector Update Stellar show; high revenue visibility On strong growth path; Company 22-Jan-21 233 Buy 17-Feb-21 NTPC ; Result Update Update Spot market on a roll: Advantage Power Exchange: New competitor 19-Jan-21 239 Buy 11-Feb-21 Power IEX; Company Update in ring; Sector Update
Rating Interpretation Daily Volume 40 325 TP 274 280 32 TP
235 220 24 (INR)
190 (Mn) 16
145 8 100 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 0 IEX IN EQUITY Buy Hold Reduce Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20
Source: Bloomberg, Edelweiss research Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage Rating Rationale
Buy Hold Reduce Total Rating Expected absolute returns over 12 months
Rating Distribution* 165 59 17 241 Buy: >15%
>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%
Market Cap (INR) 200 48 4 252 Reduce: <-5% * stocks under review
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INDIAN ENERGY EXCHANGE
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INDIAN ENERGY EXCHANGE
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Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.
Aditya Narain Head of Research [email protected]
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