An exchange of the future ?
IEX is 1st and largest
energy exchange in India has a market share of 98% in Electricity Exchange
Market. IEX started its journey in 2008 as an energy exchange platform.
IEX helps in a host of buyers and
sellers under one roof thereby ensuring ample liquidity and competition in the
marketplace leading to efficient price discovery. IEX also helped in bringing
accessibility and transparency in the power market in India, along with
enhancing the speed and efficiency of trade execution.
Distribution companies, power generators
and commercial and industrial consumers representing multiple industries are major participants on
IEX.
The OAC (Open access customers) are
very price elastic on the exchange and their trading volumes depend hugely on
the existing exchange rate. A low rate will attract a lot of OAC and a higher
rate will push the majority of the OACs
IEX and PXIL are the two power
exchanges facilitating short-term trade of power in India. IEX dominates the
space, with its share in total volume traded through exchanges at an
average of over 93.5% in the last five years.
Following chart depicts the market
share of IEX in comparison with Trading licensees and PXIL
Source: Investor presentation
IEX offerings:-
Day-ahead Market (DAM) - Trading of 96 distinct electricity
contracts of the 15-minute time block each for the next day offering ample
flexibility to the market participants. Price competitiveness is ensured by
means of price discovery through double-sided anonymous auction with uniform
clearing price thus enhancing social welfare for market participants.
Term-ahead Market (TAM) - Includes a range of options for
electricity trading for a period of up to 11 days. Trading is possible through
intra-day, day-ahead contingency, daily and weekly contracts.
Renewable Energy Certificates (RECs) - REC-solar and non-solar
alternatives. It provides the option to ensure compliance with renewable power
consumption requirements to obligated entities.
Energy Saving Certificates (ESCerts) - ESCerts are issued on accomplishing
targets for reduction in specific energy consumption, which are tradable on the
exchange.
The company mainly generates revenue
from Transaction fees, Annual subscription fees, and admission fees
62 BU (Billion units) were traded in
2018-19
Ownership
The Company is owned through
diversified shareholding, and at the end of FY2018-19, the shareholders
comprised of non-institutional investors 47%, Foreign Corporate Bodies 22.10%,
Foreign Portfolio Investors 17.61%, Mutual Funds 5.94% and other domestic
institutional investors 6.91%
The company was promoted by FTIL at
the time of incorporation but pursuant to some regulatory breaches SEBI
stripped the promoters of their promoter status and forced to divest their
stake to Foreign portfolio investors in 2014 as the promoters were declared
“improper” for the company which has lead to IEX being a non-promoter holding
company and managed by professionals.
Share buyback
The Company initiated the Buyback proposal
for buy-back of 3,729,729 equity shares of the Company (representing 1.23% of
the total number of equity shares) at a price of Rs 185/- per equity share for the aggregate amount of 69 Cr being 24.97% of the fully paid-up share capital and
free reserves.
Short term Electricity Market in
India
-India has a total installed power
capacity of about 356 GW as on 31st March, 2019, with thermal energy comprising
the largest share of 78%. In a bid to conserve natural resources, the
government has taken aggressive steps to increase the renewable energy
portfolio with encouraging reforms. In the last five years, there has been an
increase of 112% in total installed capacity of renewable energy reaching to
77.6 GW as on 31st March 2019. Renewable energy constitutes 22% share of the
total installed power mix of the country.
-Short-term power market covers
contracts of less than a year for electricity transacted through (i)
inter-state trading licensees; (ii) power exchanges; (iii) directly between
distribution licensees (cashless) and (iv) the Deviation Settlement Mechanism
-As per the report on the power market
published by CERC for FY19, size of India’s short-term power market grew from 128 billion units in FY18 to 145 billion units in FY19,
which is about 12% of the total power generation at 124 billion units
(excluding renewables).
Source: Annual report
During FY19, the volume of electricity
traded through bilateral transactions (traders & direct) increased to 69.9
billion units from 57.8 billion units (21% increase). Volume transacted
through power exchanges increased to 44 billion units from 38.2 billion units
(15% increase) and DSM volume increased marginally to 21.4 billion
units from 20.9 (2% increase) in 10 months FY19 over the same period last year.
-Between FY15 & FY19,
power traded through power exchanges grew at CAGR of 15% followed by 8%
for bilateral transactions and 7% for Deviation Settlement Mechanism (DSM).
One Nation, One Grid – A Game Changer
There was a major problem in
delivering power at cleared volumes also there was a problem in supplying power
from one surplus region to another deficit region. The development of power
grids and transmission line commissioning has lead to congestion-free
transmission of power which was very acute earlier.
This development has increased the
DISCOM confidence on exchange i.e, they can get the power, as and when
required, congestion-free.
Coal production
The majority of power produced in
India is from thermal power plants (78% of total power produced). The
production and supply of coal directly impacts the cost of production of
thermal power plants, at times of short supply of coal the inventory of power
plants reduce and the cost of production increases, which leads to low supply
of power and short supply increases the price discovery at exchanges
Long term PPA
Long term PPA between DISCOMs and
power producers are of 25 years which require a huge commitment and DISCOMs
have to buy whether they have the corresponding demand or not, this creates a
fix purchase obligation which is not in the case of short term market. They can
buy as and when required at a desirable price.
Power market forecast – only 3.8% of power traded on
exchange, this will rise (Take chart from the report)
The following chart shows the share
of power exchanges in the market in different countries in comparison with
India. It shows there is a great potential for power exchanges to increase
their market share in power trading
Source
: Investor presentation
Future opportunities:-
The access to the electricity to
every citizen on a 24x7 basis should continue to drive electricity demand over the
foreseeable future which in turn would provide a lucrative opportunity for the
power market to grow and importance.
Exchange market and products are
best suited to offer flexibility to distribution companies to manage the
intermittency associated with large penetration of renewable energy in the
grid.
Implementation on national open
access registry – Wherein all the SLDCs,
NLDCs, Generators, Discoms will be connected so that the open access
permission will be granted instantly to the permission seeker the gate closure
will reduce and round the clock transactions on the exchange platform will
become even more dynamic and closer to real-time.
The present buyer can buy power only
after 3 hours but after open-access registry this time will come down to 1 hour
hence low gate closure
The introduction of long-duration contracts on the exchange platform will solidify the position of
exchange market within the
short-term market and shift the volume from bilateral trade to the exchange.
The long duration contracts will be for a maximum period of 1 year after the
required formalities have been laid out by the regulator.
Source: Concall transcript
Phasing out of 35 GW of old and
inefficient power generation capacity will lead to the distribution
companies meeting a greater share of
their demand requirement through the exchange platform.
The introduction of cross
border trade in electricity on the exchange platform will provide an
opportunity to expand beyond the Indian geography to the South Asian countries
as well as to drive up the volumes on the exchange in the near term.
The introduction of new green
energy term-ahead market on the exchange in the future will be an exclusive
offering for the market participants to meet their energy requirements and meet
renewable
purchase obligation in an integrated
way.
The exchange also aspires to foray
into new energy market segments such as gas as well as provide
domain know-how and technology
solutions to emerging power markets worldwide.
A new subsidiary for Gas
exchange has been commissioned by the company to explore the
opportunity available in the gas exchange market where no player exists
currently which will give the company a first-mover advantage and use the existing
technology of power exchange in gas exchange which will not require any
different structures than the existing ones.
The regulator has mandated the
DISCOMs to generate LC for buying power which is a phenomenal change in
the operations of DISCOMs of paying later. They must pay upfront now which will
compel them to optimize their power use and estimates rather than overdrawing
or underdrawing power at a later stage and pay more at that time.
Source
: Concall Transcript
Derivative trading is soon to become a reality for the
exchange as the decision of the regulator was not clear earlier and now this
issue has been sorted. The spot market will still be regulated by CERC and the
derivative segment of the market will come under the surveillance of SEBI.
Source
: Concall Transcript
Financial
Performance
Numbers over the years :
Particulars
|
2009
|
2019
|
Annual traded units
(Million units)
|
2,616
|
52,189
|
Registered
participants
|
79
|
6,429
|
Price discovery (Rs per unit)
|
7.29
|
3.86
|
IEX's share of total power traded
|
0.5%
|
3.8%
|
IEX's share in short
term power market
|
7.2%
|
36.2%
|
IEX revenue ( In
lakhs)
|
1,350
|
29,415
|
The following analysis can be done
from the table:-
Revenue
- The
revenue of the company has increased from 121 cr in 2013 to 254 cr in 2019
which shows a CAGR growth of 11% which is not very compelling but given the
market conditions and the distressed power industry we can say that the company
is being able to attract more exchange participants.
The
government plan to rejig the distressed DISCOMs by initiative such as UDAY
scheme has enhanced the DISCOM participation in the exchange.
The
volume participation of Open Access Customers (OAC’s) have been volatile as it
is highly dependent on the price discovered on the exchange and in recent
quarters the OAC participation has reduced due to high price discovered (due to
high buying and low selling pressure) at the exchange but DISCOM participation have
increased.
The
main source of revenue generation is Transaction fee, the annual subscription fee
and admission fees
The
amount of fee from each member has been provided in the RHP:
Source: RHP
Operating
Margins
-The company has a very high
operating margins due to the nature of the business which involved no substantial
cost to generate revenue. The company is able to maintain a steady operating
margins which have increased from the previous years which shows that the
company is increasing its operating efficiency
Finance
Cost
-
The company is a no debt organization as it is not capital intensive and does
not require debt for working capital as well. IEX has margin requirements from
the buyers i.e it already has advance from the buyers for the power to be
purchased and IEX pays to the power sellers after it has been delivered to the
buyer. Hence no working capital risk of IEX is present
Capex
IEX earlier used to charge technology expense
for the software it uses but in FY 18 IEX bought the exclusive usage rights of
the trading software through a Perpetual Usage Agreement from 63 Moons while
also absorbing 22 employees along with the trading software.
Souce :
Concall transcript
Free Cash Flows
IEX has been able to
generate Free Cash flows in line with the bottom line ( Cumulative FCF of 671
cr vs Cumulative PAT of 758 cr). The healthy cash flow generation shows the efficiency of operations and business moat of the company.
IEX has negative
working capital as it takes the due in advance and pays after the delivery is
done.
Profit Margin
The profit margins of the company have been
consistent and has increased in recent years. This shows that the company
has reduced the expenses as compared to the revenues and it has been efficient
while doing it without jeopardizing the business functions.
Key Ratios :-
ROE – 50.47%
ROCE – 71.1%
Return on assets -
49.7%
Debt free company
Risks
Highly regulated
industry
IEX operates in a
highly regulated industry, primary authority being CERC. Every product
introduced by IEX need to approved by CERC and then floated to the market which
causes a regulatory hindrance for new product launches and their
implementation. The CERC also conducts periodical audits of IEX while also
holding the power to cancel the license if the required regulations are not
followed.
Distressed
Industry
IEX operates in the industry which is highly distressed i.e Power sector. The power sector is one
the most indebt sector where the DISCOM’s, Power Generators, Grid operators
are mostly PSU’s having high debt and are struggling to come out of the debt
despite various efforts by the government to alleviate the sector out of the high
debt
The main reason
being the inefficient PSU’s operating most of the industry, which are not being
able to vent out of the crisis because of major operational efficiencies.
Share disposal by
insiders
There has been
continuous disposal of shares by the top management in the recent past.
Source: BSE
Have any thoughts ?
Please reach out !
Kunjan Chachan
Please reach out !
Kunjan Chachan
Twitter - https://twitter.com/ANoobInvestor
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ReplyDeleteA well presented, informative article.
ReplyDelete