Power-packed return from IEX

But with a trailing P/E of 90, the stock seeing momentum trade

Power generation between April and September 2021 rose over 11 per cent year-onyear. The surge in demand was expected as the economy recovered from a low base. There have been coal shortages, as thermal power generation surged 16 per cent YOY while rainfall hit coal production.

While energy consumption was flat YOY in September at 114.5 billion units (BU), coal shortages meant merchant power was in high demand. This resulted in higher volumes on the Indian Energy Exchange (IEX). Around 55 per cent of merchant units are traded on the exchange (the rest falls under bilateral deals, etc).

Q1FY22 saw around 41 per cent

YOY rise in trading volumes and unit prices shot up.

That was on top of an excellent FY21, where a record 74 BU were traded on the IEX. The IEX traded 8.99 BU during September 2021, with 59 per cent YOY growth, across market segments. In Q2, the market traded a volume of 25.86 BU, 57 per cent growth YOY across segments.

The fastest growth came in the real-time (RT) electricity market, which traded 1.84 BU in September. The RT market traded 5.29 BU during Q2, registering 125 per cent YOY growth. Growth may also be attributed to distribution utilities and powerintensive industries opting to balance power demand in real-time.

The IEX generates revenues from two main sources. One is transaction fees, which contributed 83 per cent of total revenues in Q1FY22. The other is admission and annual membership fees, which contributed 5 per cent of revenues. Other income has a consistently high contribution of over 10 per cent over three years.

In financial terms, Q1 saw sequential growth of roughly 3 per cent of revenues at ~102.9 crore (Q4FY21 revenues of ~100.3 crore) with an Ebitda of ~86.7 crore (~83.9 crore) and PAT of ~62.1 crore (~61.5 crore). The extremely high operating margin is worth noting — essentially expenses remain the same whatever the transaction volumes.

Looking at the medium and long term, the IEX reckons there may be an incremental rise of another 100 BU per annum traded by 2025, given the expected rise in demand by 40 per cent and gradual phasing out of 41Gw of capacity from plants, which have power purchase agreements. This would mean more demand for merchant power and it implies over 18 per cent CAGR in trading volumes. The Draft National Electricity Policy, 2021 (NEP), also targets increasing the share of spot power markets to 25 per cent by 2023-24.

The IEX holds a 53 per cent stake in the Indian Gas Exchange (IGX) and it sold 31 per cent stake in the IGX to the NSE (26 per cent) and ONGC (5 per cent) for around ~22 crore in March. Adani Total Gas, Torrent Gas, and GAIL already held around 5 per cent each in the IGX.

The IEX’S market performance has been extraordinary with a 250 per cent return in 12 months and 17.7 per cent in the past month. At the current price of ~696, it has a trailing P/E of 90; so it’s clearly a momentum trade.