Electricity volumes drive growth in operational profit
New product launches to aid market share gains; Maintain Buy
* IEX’s result highlights the benefit of higher electricity volumes, which led to an 8% YoY rise in S/A EBITDA (in-line) in 2QFY21. However, S/A PAT was down 4% YoY on account of higher depreciation, lower other income, and a higher tax rate.
* The launch of Real-Time Market (RTM) has kicked off well, with the product adding 2.3BUs in 2Q. With IEX’s expected entry into Longer Duration Contracts (LDCs) and its competitive positioning, we expect market share gains to continue for the company within the Short-Term (ST) Market. This would lead to a 20% EPS CAGR over FY21–23. Maintain Buy, with TP of INR245/sh based on 30x Sep’22 EPS.
Higher volumes drive growth in operational profit
* IEX’s 2QFY21 S/A EBITDA grew 8% YoY to INR575m (broadly in-line with our est. of INR598m) on the back of higher volumes.
* Electricity volumes (DAM + TAM + RTM) rose 13% YoY to 16.5BU in 2Q, but the lack of any Renewable Energy Certificate (REC) volumes impacted revenue. S/A revenue was up 5% YoY to INR708m (4% below our estimate).
* S/A PBT grew just 2% YoY to INR616m on account of higher depreciation and lower other income. S/A PAT was down 4% YoY to INR467m (5% below our est.) on account of higher tax rate.
* At the consolidated level (incl. gas exchange), EBITDA was up 4% YoY, while PAT was down 9% YoY to INR443m.
Management commentary – new products faring well
* RTM did 2.3BUs for the co. in its first full quarter. IEX is also working with states to help them optimize their purchases and shift from DSM to RTM. Additionally, the launch of Green Term-Ahead Market (G-TAM) added 75MUs during the quarter and currently averages at 8–10MUs/day.
* In terms of LDCs, the co. has filed a petition with CERC. However, CERC would take this up only once the Supreme Court (SC) jurisdiction is settled. The SC hearing is scheduled in Dec’20.
Market share gains to drive volume/PAT CAGR of 20% over FY21–23; Buy
* The launch of RTM contributed 2.3BUs in 2Q. G-TAM has also kicked off well. Furthermore, October electricity volumes on IEX are currently up ~60% YoY, which bodes well for 3Q. Trading for RECs remains suspended, but the co expects the APTEL order to come in and thereby resume trading by Oct-end.
* The long-term potential for IEX remains huge, with just ~4% market share held by exchanges in India’s power generation. With new product launches, a continued oversupplied market, and IEX’s competitive positioning, we expect volumes/PAT for IEX to increase at a 20% CAGR over FY21–23. Given the strong growth and high return profile (RoE of ~45%), the stock trades attractively at 23x FY23E EPS. Maintain Buy, with target price of INR245/sh at 30x Sep’22 EPS.
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