DAM+TAM (short-term market) accounts for ~85% of IEX’s revenues.
India Energy Exchange’s (IEX) 4QFY19 EBITDA came in above expectations, as impact of higher exchange charges on renewable energy certificates i.e. REC reflected. This offset the 9% Y-o-Y decline in core volumes.
Near-term tepid volumes should not be extrapolated given the regulatory push for market determined pricing. We like IEX given its management execution ability, double digit earnings growth, dominant market share and strong cash flows. ‘Buy’.
DAM+TAM (short-term market) accounts for ~85% of IEX’s revenues. Short-term power market has moved up from 10.8% of power market in India in FY18 to 11.8% as per CERC for 11MFY19. Short-term volumes have risen by 16% YoY.
We believe this is a shorter-term phenomenon vs longer-term trend as exchange transparency is a key positive and FY17 to FY19 has seen a rise from 34.5% to 36%. Also, given the May 2019 elections, SEBs preferred to tie up power for 3-5 months from November 2018 onwards benefitting traders vs the exchange temporarily.
Seventy-eight percent of FY19 volumes and 70% in 4Q were driven by state distribution companies. Management indicated 4Q volumes and also April 2019 have been impacted by lower household electricity consumption due to the extended winter and unseasonal rains. This is likely to move up going ahead esp. as summer temperatures have risen sharply since mid-April 2019. We have factored a 10% YoY rise in FY20E v/s 13% YoY in FY19 given the weak April 2019 volumes.
There have been concerns on BSEPTC-ICICI announced power exchange plans. However, they are yet to receive CERC approval and our industry interactions suggest that 2-3 years is a more likely timeline for the exchange to be set up.
Between double-digit earnings CAGR in FY18-21E and a high dividend payout ratio, IEX has kept ROEs north of 40%. We remain positive with a DCF-based PT of `215. Risks: Old competition (PXIL) or any new competition becoming aggressive on pricing.
Source: financialexpress
