July 18, 2020 Initiating Coverage

INDIAN ENERGY EXCHANGE (IEX) | Power Exchange Facilitating Growth in the Power Market

Indian Energy Exchange (IEX) is ’s leading Power Exchange with a market share of Rating Buy ~95%/40% of spot/short term market. The IEX offers a transparent pricing mechanism and Current Market Price(₹) 186 liquidity to participants on its platform. Increasing traction of short term market with shift 12 M Price Target (₹) 244 of volumes towards the power exchanges and with the launch of new products will aid IEX to garner more market share in the coming years. Also, with the launch of India’s first Gas Potential upside (%) 31 Exchange, IEX will be at the forefront to lead the gas market in India. Despite the slowdown in the month of April & May owing to the lockdown, volumes on IEX have grown at 14% YoY. We expect the company to grow at CAGR of around 16% for the next three years (excluding Stock Data volumes from IGX) capturing a market share of ~47% of the short term market. We initiate FV (₹) 1 coverage on IEX with a BUY rating and a DCF based target price of ₹244. Market Cap Full (₹ bn) 56

Spot Power Market Gaining Momentum Market Cap Free Float (₹ bn) 56 Over the years, trading in the spot market has gained traction owing to better price discovery, 52-Week High / Low (₹) 204 / 112 transparent pricing mechanisms, low transmission congestion and increasing focus on renewable 2-Year High / Low (₹) 204 / 112 power. The spot market volume has grown at a CAGR of ~23% during FY10-20 over and above 1 Year Avg. Dly Traded Volume (in lakh) 8.42 the total power generation growth of only 4.5%. We expect this momentum to continue with BSE Code / NSE Symbol 540750 / IEX spot market mix to increase from 41.2%/4.5% of short term/total power generation in FY20 to ~50%/6.3% by FY23E. IEX being the market leader in the spot market will lead this growth with Bloomberg IEX IN a CAGR of 16%.

Horizontal Diversification leading to higher Volumes & Launch of IGX Shareholding Pattern (%) IEX has launched many products since its inception which led to a successful growth run. To (%) Mar-20 Dec-19 Sep-19 Jun-19 continue this growth run, the company is set to launch more products. By diversifying its product Promoter - - - - base, the company will be able to strengthen its foothold in the short term power market. New FPIs 31.99 30.53 26.48 19.57 product offerings of the company include the Real Time Market (delivery within hours of bidding MFs 12.34 7.56 7.12 9.48 with lower gate closure time, ~20 BUs opportunity), Long duration contracts (up to 365 days, ~50 BUs opportunity), Cross border trade (~4-5 BUs opportunity) and Green energy TAM. Also, the AIF 7.17 7.05 7.03 6.78 company has launched Indian Gas Exchange (IGX) a gas trading platform to capture the untapped Corporate 24.60 28.24 30.60 38.04 spot gas market. IGX will be the first Gas Exchange in India. Others 23.90 26.62 28.77 26.13

Strong Balance Sheet to Sustain Uncertain Events IEX is a zero debt company with an efficient cash conversion cycle. The company earns gross Price Performance (%) margin of 80% resulting in higher operating leverage. Even during the lockdown in the month (%) 1M 3M 6M 1YR 2YR of April & May, volumes traded on the IEX platform have increased by ~14% YoY displaying its strong business model. IEX earns ROE/ROCE of more than 40%/50% with a dividend payout ratio IEX 1% 19% 0.4% 28% 16% of 50%. We expect the company to maintain this going forward. NSE Nifty 10% 18% -12% -7% -1%

* To date / current date : 17-Jul-20 YE Mar 2017 2018 2019 2020 2021E 2022E 2023E Total sales (₹ Cr) 199 230 254 257 291 345 385 EBITDA margins (%) 70.2 80.2% 79.8% 78.6% 78.0% 79.4% 80.2% IEX vs Nifty 50

PAT margins (%) 57.2% 57.1% 65.0% 68.3% 63.7% 65.6% 67.5% IEX NIFTY 50 140 EPS (₹) 3.7 4.3 5.4 5.9 6.2 7.6 8.7 120 P/E (x) 43.5 36.9 30.3 21.8 30.4 24.9 21.6 100 P/BV (x) 17.8 17.1 13.5 9.9 11.6 9.4 7.8 80 EV/EBITDA (x) 33.5 25.7 24.3 18.8 24.1 19.3 16.6 60 40 ROE (%) 40.8% 46.4% 44.6% 45.3% 38.4% 37.8% 36.0% 20 ROCE (%) 61.8% 66.2% 58.1% 52.6% 47.1% 46.9% 45.1% 0 Dividend yield (%) 2.1% 1.4% 0.0% 2.0% 1.7% 1.7% 1.7% Jul-18 Nov-18 Mar-19 Jul-19 Nov-19 Mar-20 Jul-20

Meet Jain | [email protected] LKP Research +91 22 6635 1220 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Investment Arguments

Short Term Power Market Gaining Momentum Indian power market is currently dependent upon long term contracts to meet their overall power requirements. However, to meet a sudden increase or decrease in demand and supply, the short term market plays a vital role. Short Term Market (STM) represents contracts of less than a year for electricity transacted under bilateral transactions through Inter-State Trading Licensees and directly by the Distribution Licensees, Power Exchanges and Deviation Settlement Mechanism. Over the years, trading in the spot market has gained traction owing to better price discovery, transparent pricing mechanism, low transmission congestion and focus on renewable power among others. The short term market volume has grown at a CAGR of 7.6% during FY10- 20 over and above the total power generation growth of only 4.5% for the same period.

Shift of Volumes towards Short Term Market

Short Term Market (BUs) % of Total Power Generation 160.0 11.0% 12.0% 10.2% 10.2% 10.2% 10.6% 9.8% 9.8% 140.0 9.6% 9.6% 8.9% 145.2 10.0% 120.0 8.2% 137.2 127.6 8.0% 100.0 115.2 119.2 104.6 80.0 94.5 98.9 99.0 6.0% 81.6 60.0 65.9 4.0% 40.0 2.0% 20.0 - 0.0% 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Source: Company, LKP Research The share of short term market in the total power generation has also been on an uptrend from 8.2% in FY10 to 11% in FY20 as depicted in the above chart. We expect this trend to further increase to 12.3% by FY22 as more participants trade through this route. The major beneficiary of increasing short term market volume will be IEX owing to their pan India coverage, low unit price and wide range of product offerings.

The share of spot market (i.e. through power exchange) in the short term market has increased to 41.2%/4.5% of the STM/total power market in FY20 from 10.9%/0.9% in FY09. While the total power generation volumes grew by only 4.5% over the last decade, the volumes traded through the spot markets has grown at a CAGR of 23% as dipicted below.

Spot Market Gaining market share since inception with CAGR of 23%

Spot Market (BUs) % transaction through Exchange in regards to STM % transaction through Exchange in regards to Total 60.0 41.2% 50.0% 36.9% 50.0 37.4% 56.4 34.5% 40.0% 53.5 40.0 29.3% 29.7% 30.4% 47.7 23.8% 41.1 30.0% 30.0 19.0% 35.0 16.4% 30.7 29.4 20.0% 20.0 10.9% 23.5 15.5 15.5 4.5% 10.0% 10.0 7.2 2.4% 3.0% 2.6% 3.0% 3.3% 3.6% 3.9% 1.7% 0.9% 1.8% 0.0 0.0% 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Source: Company, LKP Research

LKP Research 2 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

As of FY20, share of volumes traded through IEX was 39.3%/4.3% of the STM/total power market. The share of IEX is expected to further increase to ~46%/5.6% STM/total power market by FY22 with the introduction of new products like RTM, long duration contracts, cross border trade, green TAM etc.

During the Covid-19 lockdown, IEX has seen a shift in the volumes towards power exchanges. Many discoms have resorted to power exchanges to optimize their costs owing to lower prices of power on the exchanges as compared to other modes. IEX has seen an increase in volumes for Q1FY21 by 14% to 14.85 BUs from 12.99 BUs the same period last year. Below are some testimonials from major Discoms during the Covid-19 lockdown

“We’ve been doing this for 6-7 months at APTransco, and we managed to save Rs. 500 crore in FY20. We were well placed to maximize this benefit when spot prices fell on the exchange "We are increasingly buying power during the lockdown in March and April. We from exchanges, which is cheaper saved Rs. 56 crore and Rs. 132 crore in those than PPA tariffs," two months. We were able to buy power for as Mahavitran –April 12, 2020 low as Rs.1.8 a unit at one point.” AP Transco – May 28, 2020

Indian Power Market Is At Nascent Stage As Compared To Its Global Peers Power exchanges at the world work on the principle of market efficiency, competitive price discovery mechanism, transparency and risk mitigation. These factors have helped the global power exchanges to play a significant role in their power markets. The power exchanges across the world work on different models suitable for their regions such as in Australia and the US have a mandatory power market model while Nordpool, EPEX (Europe) and IEX (India) works on the voluntary market model. India’s power market resembles the EU power market in terms of structure, competition, regulation and pricing. As compared to its global peers, penetration of power exchanges in India is very less at present. The global power market penetration is in the range of around 30-70% of the total power market.

Share of Global Power Markets as a % of their Total Power Generation

91%

53% 53% 53%

29% 23%

4%

Nordpool UK France Germany Austria Belgium India

Source: Industry, LKP Research

LKP Research 3 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Comparison of IEX with Global Peers

IEX NordPool PJM NEM EPEX Spot

Voluntary for day- Voluntary for day ahead Compulsory for day ahead Compulsory for day- Participation Voluntary ahead and adjustment and adjustment market market ahead spot Market

Intra-day market and Day-ahead spot, real-time Intra-day market, Day-ahead spot, hour Day-ahead spot and Market Offerings limited forward contracts balancing, capacity credits day-ahead auction, and ahead short-term forwards up to 11 days, RTM market balancing market

Bidding Type Double-sided Double-sided Single-sided Single-sided Double-sided Intra-day auction market Real-time / Balancing Bid quantity can be changed Intra-day auction Intra-day (Elbas technology Market till gate closure market platform) Counter-trade for real- Through purchase of Deviations are subjected Deviations are traded in Counter-trade for Pricing Rule time, participants are ancillary services, reserve to DSM charges real-time real-time given MCP capacity buying

Pricing Type Ex-ante Ex-ante Ex-post Ex-post Ex-ante

FTRs-ARRs, bilateral OTC, Bilateral OTC, derivatives Hedging options with Forwards and futures on multi settlement market, Bilateral OTC on Sydney futures OTC clearing participants separate markets virtual bidding, financial exchange trading at NYMEX

Security constrained Location signals for Congestion Management Market splitting Market splitting Market Splitting economic dispatch transmission tariff

Source: Industry, LKP Research

Monopolistic Business Environment, Limited Entry Barrier IEX enjoys the monopolistic business environment with the majority of the market share. There are two other power exchanges; Power Exchange of India Ltd (PXIL) and National Power Exchange Ltd (NPEX). All the power exchanges have been incorporated around the same time in FY09; however, IEX has been able to significantly scale up its operations over the years creating market dominance. IEX currently holds a market share of ~95% in FY20. PXIL is promoted by National Stock Exchange, NCDEX, Tata Power, PFC, GMR Energy, Gujarat Urja Vikas Nigam Ltd etc. PXIL commenced operation at the same time as IEX but failed to garner market share. Also, PXIL currently is a loss making entity with a market share of only 5%. NPEX is another power exchange incorporated in 2009 and promoted by PFC, NTPC, NHPC, and TCS. However, the operation is yet to be commenced. The major reason for the growth of the company is its superior technology platform, better price discovery and higher customer participation.

Market Leader Since Inception

IEX PXIL

5.4% 7.3% 3.1% 4.6% 3.6% 2.1% 1.5% 3.1% 2.5% 4.6% 12.8% 18.1%

94.6% 92.7% 96.9% 95.4% 96.4% 97.9% 98.5% 96.9% 97.5% 95.4% 87.2% 81.9%

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Source: Company, LKP Research

LKP Research 4 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Although IEX enjoys monopoly, risk of other existing and new players taking over the volumes still exists. New power exchange is being formed, promoted by PTC (India’s largest licensed power trader), BSE (one of the prominent stock exchanges) and ICICI Bank (leading private sector bank). Currently, regulatory proceedings are underway and if this exchange launches, it will be a threat to the company’s volumes as PTC accounts for ~20% of the IEX volumes. New Product Launches To Further Aid Higher Volumes Since its inception, IEX has launched various products like DAM, TAM, RECs and ESCerts. IEX has new product launches in the pipeline awaiting approvals which include Long duration contracts (LDC), Green TAM and Cross border trading.

IEX has also recently launched Real Time Market which is another major milestone in the company’s growth story. Launch of RTM will enable the participants to deliver power within a few hours of bidding by reducing the gate closure time. With the launch of RTM, IEX is aiming to cater to the 20.8 BU market which is currently served by DSM. The company aims to gradually capture a higher share of the DSM market into the RTM. Other reason for the shift to RTM is better pricing, low transmission congestion, higher liquidity and cost optimization which can help the discoms to reduce their losses. In the first month of trading, RTM platform has traded volume of 515.5 MUs.

Long Term (90%) Short Term (10%) (3Yr CAGR: 8%; YTD Feb’20: -4.9% YoY)

1,274 BU (incl REN)*

OTC: Exchanges: Up to 25 years Real Time Intraday to 1 year Intraday – 11 days

1,146.3 BU 54.7* BU 52.1* BU 20.8* BU

90.0% 4.3% 4.1% 1.6% Exchanges (Only up to 11days) Deviation Bilateral & Banking settlement / Long-term PPA • DAC Transactions • Daily Unscheduled • Weekly Interchange • Day Ahead Market

* As of YTD Feb FY’20; CAGR calculated for 3 years ending FY’19 Source: Industry, Company, LKP Research

Long Duration Contract Another product is the LDC which will cater to the 50 BU of banking and bilateral transactions that happen in the country. LDC will involve contracts for the period up to 365 days which were earlier catered by the Traders and OTC market. In LDC, there will be a shift from bilateral and OTC transactions to the power exchanges with better pricing, liquidity and regulated transaction. The LDC will involve the physical delivery of power which will be regulated by CERC and the financially settled derivatives contracts regulated by SEBI. No confirmed launch date has been released by the company but is expected to be launched soon.

Green TAM The Green energy term ahead market will enable the participants to fulfill their energy requirements along with the renewable purchase obligations in an integrated way. The company plans to launch this in Q2FY20 after receiving approvals from CERC.

LKP Research 5 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Cross Border Trade Cross border trading on the IEX platform will provide an opportunity to expand beyond the Indian Territory to the South Asian countries as well. The launch of the cross border will lead to higher volumes on the platform. Final regulations from the Ministry of Power are awaited post that the company can launch this. The company is targeting 1 BU out of the 4 -5 BU market.

With the launch of new products, the company is expected to grow its volumes at a CAGR of 16% for the next few years capturing more market share. Unlocking New Opportunities In The Gas Market Gas is another form of energy which is considered to be a cleaner form of fuel. Currently, the share of gas in the Indian energy mix is around 6.2% which the government aims to increase to 15% to make India a Gas based economy. The Indian gas market is currently around 166 mmscmd and is poised to grow to around 600 mmscmd in over 8-10 years. IEX has recently floated a wholly owned subsidiary named Indian Gas Exchange facilitating trading of gas in India. IEX has created this gas trading platform in partnership with GMEX, a UK company. The company is the first exchange in this sector and will be the major beneficiary in the growth of the gas market in India.

The Indian gas pipeline is currently spread across 17,000 km in the North and West region with further expansion to 32,000 km cover other parts of the country. Along with the pipeline expansion, the government is also planning to setup gas terminals to increase the LNG import capacity from 37.5 MTPA to 62.5 MTPA.

Source: Company, LKP Research IGX will currently facilitate the delivery of gas at three delivery hubs – Dahej, Hazira in Gujarat and Kakinada in Andhra Pradesh. The company plans to initially capture ~2-3% of the spot market volume. In the first month of the launch, the company has already onboarded 12 members and 350+ clients covering all gas consuming sectors. With the growing consumption of gas across the sector, IGX will play a vital role in increasing the liquidity and building a better mechanism for the gas market in India.

LKP Research 6 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Strong Balance Sheet to Sustain Uncertain Events Since its inception, IEX has grown its operations multifold to become a market leader in the Indian power exchange market. The company has been growing at a CAGR of 10% for the last five years owing to robust technology and new product offering leading to a shift of volumes from the short term and long term contracts. IEX has an asset light business model with an EBIDTA margin of around 80% in FY20. The major cost for the company is technology and manpower cost which accounts for around 20% of its revenue. With the launch of gas exchange, IEX’s manpower cost is expected to increase by around ₹18-20 crores p.a., however, we expect the company to maintain its margin around 80% levels for the next few years with increasing volumes.

Upward Revenue Trend with Stable Margins

500 80.2% 80.2% 82.0% Revenue (Rs. Crore) 79.8% 79.6% 79.4% 78.0% 80.0% 400 EBIDTA (Rs. Crore) EBIDTA Margin % 78.0% 300 76.0% 72.2% 74.0% 71.5% 200 385 345 72.0% 291 230 254 257 70.0% 100 175 199 68.0% 125 143 185 203 204 227 274 309 - 66.0% 2016 2017 2018 2019 2020 2021E 2022E 2023E

Source: Company, LKP Research IEX has no debt in its books and a superior return profile earning a ROE/ROCE of more than 40/50%. We expect the company to easily maintain this level going forward.

ROE / ROCE (%)

70.0% ROE (%) ROCE (%) 60.0% 66.2% 61.8% 58.1% 50.0% 52.6% 40.0% 47.1% 47.0% 45.2%

30.0% 46.4% 44.6% 45.3% 20.0% 40.8% 38.4% 37.9% 36.1% 10.0%

0.0% 2017 2018 2019 2020 2021E 2022E 2023E

Source: Industry, LKP Research

LKP Research 7 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Key Risks & Concerns Regulatory Risk Trading on a power exchange is governed by CERC which acts as a regulator for the power market. Transaction fees charged by IEX are set by the regulator and only they can change or modify the fees for trading on power exchange. This poses a risk for the company’s revenue in case the regulator decides to lower the transaction fees. Technological Risks IEX is a technology based platform provider for trading of power. The use of obsolete technology along with the threat to data security could affect the operations of the company. Competition Risk At present, IEX enjoys a monopolistic business environment with limited threat from peers. However, any shift of volumes to PXIL or the new entity will affect the growth prospects of the company.

IEX has been on the forefront to mitigate these risks by following a robust risk management framework. Along with the risks mentioned above, IEX identifies risks across 14 risk categories:

LKP Research 8 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Outlook & Valuation

IEX is a leading player in the growing spot market and is sweetly placed in the growth trajectory of the overall short term power market. There is an increasing shift in the volumes from the long term PPAs to short term market and more specifically to the power exchanges owing to better liquidity, price discovery mechanism and low congestion. These attributes play a vital role in decision making process of the discoms to transact through spot market rather than other platforms. With an increasing shift of volumes from other short term platforms to IEX we expect the volumes of the company to grow at a CAGR of 16% for FY21-23E. Gas exchange volumes are not included in valuing the company; however, we expect the gas business to notably contribute to the company’s value. We have initiated coverage on IEX with BUY rating and valued the company using the Discounted Cash Flow method to arrive at a target price of ₹244

DCF Model Terminal Particulars (₹ Crs) 2021E 2022E 2023E 2024E 2025E year IEX Volumes (BUs) 61.72 74.73 84.20 96.08 107.69 Transaction fees 0.04 0.04 0.04 0.04 0.04 Transaction Revenue (incl. REC) 270.5 323.4 362.4 411.0 458.6 Annual Subscription fees 20.0 21.3 22.5 23.9 25.3 Total Revenue 290.5 344.7 385.0 434.9 483.9 EBIDTA 226.9 273.8 308.9 352.4 392.1 PAT 185.3 226.2 260.1 300.7 340.7 Depreciation 16.3 17.2 18.2 19.1 20.0 Capital Expenditure -5.0 -5.0 -5.0 -5.0 -5.0 Working capital investment 29.30 46.70 37.68 46.72 45.91 Free Cash Flow 225.9 285.1 310.9 361.5 401.6 8017.0 Discounted cash flow 210.8 241.3 238.7 251.6 253.5 5580.3

Sum of discounted cash flows-Firm value 6776.3 Add: Cash and Investment 542.3 Equity Value 7318.5 Shares outstanding (Crs) 29.96 Equity price (₹) 244

Key Assumptions Particulars % WACC* (Beta @ 0.47) 10.3% Long term Growth rate 5.0% * No debt, therefore Cost of Equity = WACC

LKP Research 9 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

KEY MANAGEMENT - IEX

Name & Designation Brief Profile

Mr. Goel was appointed as the Non-Executive Chairman of our Board with effect from July 21, 2019. He holds a bachelor’s degree in electrical engineering from REC Rourkela and a master’s degree in business administration from the Faculty of Management Studies, New Delhi. He was appointed as the Managing Director and Chief Executive Officer of the Company with effect from January 21, 2014. After completion of the term on 20.07.2019, Mr. Satyanarayan Goel Mr. Goel was designated as Non-Executive Chairman of the Board of Directors. Before joining IEX, he was the Non-Executive Chairman director of marketing and operations at PTC India Limited. Prior to it, he was associated with NTPC Limited for 29 years and retired as an Executive Director. He has been associated with our Company since October 16, 2012 when he was appointed as a Nominee Director of PTC India Financial Services Limited on our Board. He has over 40 years of rich experience in different areas of power sector.

Mr. Rajiv has joined IEX on 3rd June, 2009 as an MD & CEO. Prior to joining IEX, he held several leadership positions in trade bodies like CII, MAIT, AMCHAM and NASSCOM. He was a Chief Operating Officer and Head of Mr. Rajiv Srivastava Sales Strategy & Operations in HP Inc He has also worked with other blue chip organization like HCL Hewlett- Managing Director and CEO Packard Ltd and Escorts Yamaha Motorcycle Ltd. He holds a bachelor’s degree in Mechanical Engineering with further specialization in international business.

Mr Rajesh has joined the company on 12th September, 2007. Prior to that he was appointed as a vice president – special projects at of India Limited on March 12, 2007. He has an experience of 29 Mr. Rajesh Kumar Mediratta years in the power sector. He has also worked with companies like Central Electricity Authority and Powergrid Director -Strategy & Regulatory Affairs Corporation of India Limited. He holds a bachelor’s degree of mechanical engineering from the Rani Durgavati Vishwadvidyalaya, Jabalpur and a degree of master’s of business administration from the Indira Gandhi National Open University, New Delhi.

Mr Vineet joined IEX as the Company Secretary on 16th January, 2010. He was later also appointed as CFO with effect from 9th May, 2014 and as Compliance Officer with effect from 30th May, 2017. He holds a bachelor’s Mr. Vineet Harlalka degree of commerce from the University of Delhi, New Delhi and has been admitted as an associate of the CFO & Company Secretary Institute of Chartered Accountants of India and the Institute of Company Secretaries of India. He has more than 20 years of experience in the field of finance, taxation, and treasury, secretarial and accounting practice. Prior to joining our Company, he has worked with New Holland Fiat (India) Private Limited

LKP Research 10 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Company Overview

Indian Energy Exchange (IEX) is India’s first and the leading power exchange with a market share of ~95%. The company enjoys a monopolistic business environment since its inception in 2008. IEX offers an automated trading platform for the physical delivery of electricity, Renewable Energy Certificates (REC) and Energy Saving Certificates (ESCerts) across India. The company has a vast customer base of more than 6,600 participants comprising of 4000+ industries, all the DISCOMs (55+), 100+ ESCerts Entities, 500+ Generators and 1500+ Renewable Energy Generators and Obligated Entities.

Customer Base of 6600+ Participants

7000 1500+ 6000 5000 500+ 4000+ 55+ 100+ 4000 3000

No of Participants 2000 1000 0 Industries DISCOMs ESCerts Entities Generators RE Generators & Obligated Entities

Source: Company, LKP Research

IEX offers various products ranging from deliveries on the same day or up to 11 days. The company’s product portfolio includes:

1. Day ahead Market (DAM): In this, the participants trade in a 15 minutes blocks for delivery scheduled for the next day. The buying and selling is done anonymously in a double sided auction with a uniform market clearing price. The majority of the spot trading happens in the DAM with a contribution of around 82% of the transaction fees. Out of the two exchanges, IEX has a monopoly in this segment with a market share of almost 100%.

2. Term ahead Market (TAM): TAM enables the participants to transact electricity for the same day through intraday contracts, for the next day through day-ahead contingency, on daily basis for rolling seven days through daily contracts, and on weekly basis through weekly contracts to manage their electricity portfolio for different durations. TAM covers transaction of electricity for duration up to 11 days.

3. Real Time Market (RTM): The company recently launched the RTM on 1st June 2020 with the delivery after 1 hour of the auction. Trading is done in a 15 minutes contract with auction features similar to DAM. The company aims to further reduce the gate closure time from the current 1 hour.

4. Renewable Energy Certificates (REC): Trading in RECs was launched in February 2011. REC market facilitates trading in environmental attributes that are classified into solar and non-solar. One REC represents 1 MWh of energy generated from renewable sources. The REC mechanism helps the renewable power generator to recover its cost while the non renewable power generators are required to meet their Renewable Purchase Obligation (RPO) by purchasing this REC.

LKP Research 11 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

5. Energy Saving Certificates (ESCerts): IEX is the first and only power exchange to commence in trading in ESCerts on 26 September 2017. ESCerts are tradable certificates under the Perform, Achieve, Trade (PAT) Scheme of Bureau of Energy Efficiency (BEE) to incentivize energy efficiency in large energy intensive industries. Industries achieving an excess reduction in energy above their target receive ESCerts, which they can trade on power exchange. The buyers of this ESCerts will be the industries who miss their energy efficiency targets for energy saving to offset their shortfall.

IEX has recently floated a wholly owned subsidiary Indian Gas Exchange (IGX) to facilitate trading in gas in India. IGX offers products with delivery ranging from Daily Weekly, Fortnightly and Monthly.

Revenue Model of IGX is as follows: • Admission fees of ₹25 lakhs for members (Have earlier given discounts to IEX members till 30th June).

• Annual fees of ₹5 lakhs for members.

• Client fees of ₹1 lakh

• Transaction fees - Ex hub (lower fees - ₹5) & Delivered (higher fees - ₹7)

LKP Research 12 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Income Statement Particulars (₹ in Cr) 2017 2018 2019 2020 2021E 2022E 2023E

Total Revenue From Operations(Net) 198.7 230.4 254.1 257.1 290.7 344.9 385.2

% Growth 16.0% 10.3% 1.2% 13.1% 18.6% 11.7%

Expenses

Employee Benefit Expenses 15.5 24.1 24.8 33.2 39.2 44.1 49.3

Other Expenses 39.7 21.5 26.4 21.7 24.6 26.9 27.0

Total Expenses 55.2 45.6 51.3 55.0 63.8 71.0 76.3

EBITDA 143.5 184.9 202.8 202.2 226.9 273.8 308.9

EBITDA Margin (%) 72.2% 80.2% 79.8% 78.6% 78.0% 79.4% 80.2%

Other Income 34.2 25.6 40.1 40.3 38.7 47.7 59.1

Depreciation and Amortization Expenses 3.4 10.3 10.4 15.2 16.3 17.2 18.2

EBIT 174.3 200.2 232.5 227.2 249.4 304.4 349.9

EBIT Margin (%) 87.7% 86.9% 91.5% 88.4% 85.8% 88.3% 90.8%

Finance Cost 0.4 0.2 0.7 1.6 1.8 2.1 2.3

Profit / (Loss) before exceptional items and tax 173.9 200.0 231.7 225.6 247.6 302.3 347.5

Exceptional Items ------

PBT 173.9 200.0 231.7 225.6 247.6 302.3 347.5

PBT Margin (%) 87.5% 86.8% 91.2% 87.7% 85.2% 87.6% 90.2%

Tax Expense 60.3 68.3 66.7 49.9 62.3 76.1 87.5

Current tax expense for current year 61.1 54.0 57.3 49.6 62.3 76.1 87.5

Deferred tax -1.9 -1.2 9.8 0.2 - - -

Other Tax Adjustments 1.1 15.6 -0.4 0.2

Profit / (Loss) for the year 113.6 131.7 165.0 175.7 185.3 226.2 260.1

PAT Margins % 57.2% 57.1% 65.0% 68.3% 63.7% 65.6% 67.5%

LKP Research 13 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Financial Ratios Particulars (₹ in Cr) 2017 2018 2019 2020 2021E 2022E 2023E

Per Share Data (₹)

EPS 3.74 4.34 5.44 5.87 6.19 7.55 8.68

Cash EPS 3.86 4.68 5.79 6.37 6.73 8.13 9.29

BV/Share 9.17 9.35 12.21 12.95 16.13 19.96 24.09

DPS 3.50 2.20 - 2.50 3.09 3.78 4.34

Payout (%) 93% 51% 0% 43% 50% 50% 50%

Growth Ratios (%)

Sales Growth 13.49% 16.01% 10.25% 1.20% 13.07% 18.63% 11.67%

EBIDTA Growth 14.60% 28.87% 9.71% -0.33% 12.24% 20.69% 12.80%

EBIT Growth 18.63% 14.89% 16.11% -2.28% 9.76% 22.06% 14.95%

EBT Growth 18.56% 15.04% 15.88% -2.64% 9.74% 22.08% 14.97%

PAT Growth 13.42% 15.94% 25.32% 6.48% 5.44% 22.08% 14.97%

Valuation Ratios (x)

P/E 43.50 36.92 30.32 21.81 30.37 24.88 21.64

Cash P/E 42.23 34.25 28.52 20.07 27.92 23.12 20.23

EV/Sales 24.23 20.60 19.43 14.80 18.79 15.34 13.28

EV/EBITDA 33.55 25.68 24.34 18.82 24.08 19.32 16.56

P/B 17.76 17.13 13.52 9.88 11.65 9.41 7.80

Mcap/Sales 24.87 21.10 19.70 14.91 19.35 16.32 14.61

Operating Ratios

Fixed Asset Turnover Ratio (x) 22.89 1.93 2.27 2.16 2.70 3.61 4.68

Asset Turnover Ratio (x) 0.36 0.40 0.36 0.39 0.37 0.36 0.34

Inventory Days ------

Trade Receivables Days 0.38 0.34 65.92 0.26 0.26 0.26 0.26

Trade Payables Days 315.92 134.04 192.25 108.70 105.00 100.00 100.00

Profitabilty Ratios (%)

EBITDA Margin 72.2% 80.2% 79.8% 78.6% 78.0% 79.4% 80.2%

EBIT Margin 87.7% 86.9% 91.5% 88.4% 85.8% 88.3% 90.8%

EBT Margin 87.5% 86.8% 91.2% 87.7% 85.2% 87.6% 90.2%

PAT Margin 57.2% 57.1% 65.0% 68.3% 63.7% 65.6% 67.5%

Return Ratios (%)

ROE 40.82% 46.41% 44.57% 45.29% 38.35% 37.84% 36.03%

ROCE 61.85% 66.20% 58.09% 52.60% 47.09% 46.94% 45.13%

Liquidity & Leverage Ratios (x)

Current Ratio 1.63 1.37 1.27 1.46 1.83 2.14 2.43

Interest Coverage Ratio 414.93 883.59 316.64 145.11 140.87 144.94 149.20

Net Debt/Equity Ratio -0.46 -0.40 -0.18 -0.07 -0.34 -0.56 -0.71

Financial Leverage 1.99 2.02 1.91 1.72 1.64 1.60 1.55

LKP Research 14 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Balance Sheet Particulars (₹ in Cr) 2017 2018 2019 2020 2021E 2022E 2023E Equities And Liabilities Shareholders’ funds Share capital 30.13 30.16 30.19 29.83 29.83 29.83 29.83 Reserves and surplus 248.09 253.56 340.08 358.12 453.26 567.95 691.89 278.21 283.72 370.27 387.95 483.09 597.78 721.72 Non-current liabilities Other Financial Liabilities 1.19 1.28 1.72 13.61 15.39 18.26 20.39 Long term Provisions 2.27 2.63 3.65 5.71 6.45 7.66 8.55 Deffered Tax Liabilities (Net) - 14.68 24.41 24.43 24.43 24.43 24.43 Other Longterm Liabilities 0.10 0.14 0.17 0.18 0.20 0.24 0.26 3.56 18.73 29.95 43.93 46.47 50.58 53.63 Current liabilities Trade payables 171.94 84.63 133.83 76.57 83.64 94.49 105.52 Other Financial Liabilities 81.31 165.60 153.56 139.42 157.64 187.00 208.83 Short term Provisions 0.14 0.17 0.36 0.09 0.10 0.12 0.13 Current Tax Laibilities (Net) 4.36 5.23 2.73 2.65 2.65 2.65 2.65 Other current liabilities 14.44 16.19 14.88 16.66 18.83 22.34 24.95 272.19 271.81 305.34 235.38 262.85 306.60 342.08 Total Equity & Liabilities 553.97 574.27 705.56 667.26 792.42 954.96 1,117.43 ASSETS Non-current assets Fixed assets Tangible assets 6.05 7.23 7.16 21.80 20.38 18.01 14.70 Capital work-in-progress 0.33 0.29 0.35 0.03 0.03 0.03 0.03 Intangible assets 2.30 111.76 104.21 97.18 87.33 77.48 67.63 Intangible assets under development 0.63 0.24 0.90 3.81 3.81 3.81 3.81 Financial Assets: Non-current investments 71.17 77.56 202.22 196.75 196.75 196.75 196.75 Long-term loans and advances 0.88 1.38 1.71 0.46 0.46 0.46 0.46 Other fiancical assets 25.83 - - 2.03 2.29 2.72 3.03 Deffered Tax Assets (Net) 0.98 ------Non-current tax assets (net) 1.20 1.02 0.99 0.21 0.21 0.21 0.21 Other non-current assets 0.64 1.27 0.64 0.39 0.44 0.53 0.59 110.00 200.74 318.18 322.65 311.69 299.99 287.21 Current assets Inventories - - - Investment 311.93 190.91 272.44 311.82 311.82 311.82 311.82 Financial Assets: Trade receivables 0.21 0.22 45.89 0.19 0.21 0.25 0.28 Cash and Bank balances 81.64 53.10 50.82 12.86 28.58 52.18 36.96 Other Balances with Banks 46.81 61.26 16.80 14.78 134.78 284.78 474.78 Short-term loans and advances 0.04 0.03 0.03 2.08 2.08 2.08 2.08 Other financial assets 1.71 67.01 0.13 0.30 0.34 0.40 0.45 Other current assets 1.63 0.99 1.29 2.58 2.91 3.46 3.86 443.96 373.52 387.39 344.60 480.72 654.97 830.23 Total Assets 553.97 574.27 705.56 667.26 792.42 954.96 1,117.43

LKP Research 15 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

Cash Flow Particulars (₹ in Cr) 2017 2018 2019 2020 2021E 2022E 2023E

CASH FLOW FROM OPERATING ACTIVITIES

Profit / (Loss) before Tax 173.85 200.00 231.75 225.62 247.60 302.27 347.53

Depreciation and Amortization 3.42 10.27 10.42 15.24 16.28 17.22 18.16

Interest (7.92) (5.45) (2.90) (0.30) (6.45) (15.13) (26.28)

Other Operating Activities (25.47) (19.32) (35.98) (37.30) - - -

Working capital changes 123.06 (2.50) (5.43) (28.19) 29.30 46.70 37.68

Income tax paid (61.04) (51.84) (59.59) (49.05) (62.32) (76.08) (87.47)

NET CASH GENERATED BY OPERATING ACTIVITIES (A) 205.90 131.16 138.27 126.02 224.40 274.97 289.61

CASH FLOWS FROM INVESTING ACTIVITIES

Capital Expenditure (1.33) (120.42) (3.60) (7.77) (5.00) (5.00) (5.00)

Change in Investments (35.32) 83.25 (66.17) 3.68 (120.00) (150.00) (190.00)

Other Investing Activities 15.44 3.75 7.64 1.57 8.22 17.23 28.63

NET CASH GENERATED / (USED) IN INVESTING ACTIVITIES (B) (21.20) (33.42) (62.12) (2.52) (116.78) (137.77) (166.37)

CASH FLOW FROM FINANCING ACTIVITIES

Interest paid (0.13) (0.05) (0.04) (0.84) (1.77) (2.10) (2.35)

Dividend paid (90.38) (105.49) (66.40) (74.60) (74.89) (92.64) (113.09)

Corporate dividend tax paid (18.52) (21.61) (13.72) (15.40) (15.25) (18.86) (23.03)

Buyback (69.00)

Other Financial Activities - 0.87 1.72 (1.61) - - -

NET CASH GENERATED / (USED) IN FINANCING ACTIVITIES (C) (109.04) (126.27) (78.44) (161.45) (91.91) (113.60) (138.47)

Net Change in Cash (A+B+C) 75.67 (28.54) (2.29) (37.96) 15.72 23.60 (15.23)

Cash & cash equivalents at the end of the year 81.64 53.10 50.82 12.86 28.58 52.18 36.96

LKP Research 16 INDIAN ENERGY EXCHANGE (IEX) | Initiating Coverage

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