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Volume metamorphosis but risks abound

“There are decades when nothing happens and there are weeks where the decade happens” – Lenin. IEX plodded through the volume journey of first 100BUs in 14 years; the next 300BUs-plus though could happen over the next one year (MBED phase 1). That said, we see two levels of ambiguity: timelines and transaction fees. To make a better sense of these unknowns, we lay down a framework to get a handle on the opportunity size while drawing from pricing evolution in other nations.

Our MBED valuation framework is based on three-stage DCF that captures reducing transaction fees progressively, yielding a revised TP of INR750. Market seems to be downplaying market coupling, renewed competition and lower brokerage. Downgrade IEX to ‘HOLD’.

Decoding MBED – Phase 1 implementation and its implications

Indian discoms follow self-scheduling among their contracted generators, with multiple prices often leading to sub-optimal scheduling of low-cost plants despite merit order dispatch. In this backdrop, the GOI has notified the launch of MBED phase 1 (NTPC generation only) from Apr-22, which targets a 3–4% reduction in power price.

Our channel checks with experts indicate a likely delay in the launch of Phase 1 (our base case: Apr-23) as it entails unprecedented changes in operations, infra and systems. Phase 1 implementation will lead to a 4x surge in exchange volumes. However, there are still no guidelines w.r.t. transaction fees (currently INR4paisa/kWh) that exchanges can charge. Besides, Phase2/3 implementation of state/private gencos is likely to be a Herculean task and could take four–six years.

IEX volume momentum going strong, likely to sustain

IEX is tracking ~50% volume growth in H1FY22 on deepening spot market trend (read Jan 21), power shortage, favourable base and product launches. While the growth rate is likely to taper down on a strong base, it is likely to track 20% growth in ensuing quarters riding the launch of products such as LDC and IDAM. We surmise a 50% market share for IEX in the traders market due to better economics and transparency. Accordingly, we have upped our EPS by 8% each for FY22E and FY23E.

Outlook and valuation: Unfavourable risk-reward; downgrade to ‘HOLD’

Our investment rationale of deepening spot market is playing out well and ahead of expectations. Since initiating the stock in Jun-20 (at INR170 which was a pre-covid high), IEX has rallied 5x on the back of 30% EPS upgrades and a 3x revision in PE. Our reverse DCF analysis suggests the stock is factoring in MBED phase 1 implementation from Apr-22 with transaction fees of INR4paisa/unit for ever.

In our view, this is tantamount to ignoring potential risks such as: i) implementation of market coupling (monopoly under threat) together with MBED; ii) lower transaction fees; and iii) competition from PRANURJA (new exchange) and renewed competition from PXIL. To be sure, IEX is a clear beneficiary of MBED implementation and we acknowledge structural growth prospects for spot market/IEX. That said, we believe the riskreward has turned unfavourable. Hence, we are downgrading the stock to ‘HOLD’.

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