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Rise in electricity volumes drives profits

Current valuations build in growth; Downgrade to Neutral

* IEX’s result highlights the benefit of strong growth in electricity volumes, which led to a 49% YoY rise in S/A EBITDA (in-line) in 4QFY21. S/A PAT jumped 35% YoY to INR638m.

* The launch of the Real-Time Market (RTM) has shaped up well, with the product adding 3.8BUs in 4Q and accounting for 17% of the total electricity volumes. With an oversupplied market, new product launches, and a strong competitive positioning, we expect market share gains to continue for the company within the Short-Term (ST) Market. However, with the recent runup in stock price, IEX now trades at 36x FY23 EPS and prices in this growth. Accordingly, we Downgrade to Neutral, with revised TP of INR375/sh.

Strong volumes drive growth in operational profit

* IEX’s 4QFY21 S/A EBITDA was up 49% YoY to INR808m (in line with our est), led by robust electricity volumes.  Electricity volumes (DAM+ TAM+ RTM) rose 61% YoY to 22.4BU. However, the lack of REC trading held back similar growth in revenue. S/A revenue was up 37% YoY to INR950m (in-line).

* S/A PAT rose 35% YoY at INR638m (in-line). At the consol. level (incl. gas exchange), EBITDA was up 48% YoY and PAT 35% YoY (to INR615m). For FY21, S/A PAT was up 25% YoY to INR2.7b, led by 37% YoY growth in electricity volumes.

Management commentary –REC resumption and LDC launch awaited

* Due to the COVID disruption, the case hearing on REC in APTEL has been postponed, with the next hearing scheduled in July. The co. is hopeful of resuming REC trading in 2QFY22. Furthermore, the SC hearing on the launch of its Longer Duration Contracts (LDCs) is still pending. The company noted it is well-prepared in terms of technology to launch the product and expects the launch within 2–3 months post a successful SC hearing.

* IEX is also keen to launch the Green Day Ahead Market (G-DAM). The co. has filed an application with CERC and expects operations to commence from 2QFY22.

Current price factors in market share gains; Downgrade to Neutral

* Since our initiation (see here), the stock is up 95% on the back of strong volumes, led by the RTM, along with a sharp re-rating in the stock. We expect market share gains to continue for IEX on the back of an oversupplied market, the recent RTM launch, and a strong competitive positioning. The resumption of RECs and launch of LDCs could provide a fillip.

* However, even as we build in 9.5m of REC trading and 4–5BUs of LDC volumes for FY23, IEX trades at 36x FY23 EPS and bakes in the structural story at play. Reverse DCF at current price implies a 17–18% volume CAGR over the next decade (3x annual power demand growth of 5–6%, in line with IEX’s volume CAGR over the past five years). Furthermore, as volumes catapult, the regulatory risk could arise over transaction fee cuts – transaction fees for Europe’s largest exchange, European Energy Exchange (EEX), are one-fifth that for IEX. Accordingly, we downgrade the stock to Neutral, with revised TP of INR375/sh (earlier: INR355) on 36x FY23 EPS. Strong off-take in volumes for gas exchange and LDCs could pose upside risks.

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