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Strong electricity volumes drive profit

Current valuations capture growth; maintain Neutral

* IEX’s result highlights the benefit of strong growth in electricity volumes, leading to a 57% YoY rise in S/A EBITDA (in-line) for the quarter. S/A PAT jumped 48% YoY to INR636m.

* The launch of Real-Time Market (RTM) has shaped up well, with the product adding 4.6BUs in 1Q and accounting for 22% of total electricity volumes. With an oversupplied market, new product launches, and 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 39x Sep’23 EPS and prices in this growth. We reiterate our Neutral rating, with revised TP of INR410/sh.

Profitability rises on strong volumes

* IEX’s S/A EBITDA grew 57% YoY to INR766m (in-line) on robust electricity volumes.

* Electricity volumes – Day Ahead Market (DAM) + Term Ahead Market (TAM) + RTM – rose 43% YoY to 21.3BU. However, the lack of REC trading held back similar growth in revenues. S/A revenue was up 36% YoY to INR905m (in-line).

* S/A PAT was up 48%YoY to INR636m (in-line). Other income, though, was down 18% YoY to INR119m (est. INR145m).

* At the consol. level (incl. gas exchange), EBITDA was up 56% YoY and PAT 48% YoY to INR621m.

Management commentary

* RTM is seeing additional volumes where load shedding or backdown was witnessed earlier. RTM now constitutes >20% of company volumes. GreenTerm Ahead Market (G-TAM) volumes should continue to be strong for the next 4–5 months until wind generation is high.

* The co. is hopeful of resuming Renewable Energy Certificate (REC) trading from September. In terms of new product launches, the SC hearing for the launch of its Longer Duration Contracts (LDCs) is still pending. LDCs may see a possible launch in 4QFY22.

* IEX is also keen to launch the Green-Day Ahead Market (G-DAM). It expects to acquire approval from CERC by August-end and should be able to launch then.

Current price bakes in volume growth; maintain Neutral

* In the past year, IEX’s stock price has more than doubled on the back of strong volumes, led by RTM. We expect market share gains to continue for IEX on the back of an oversupplied market, the recent RTM launch, and 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 in FY23, IEX trades at 42x FY23 EPS and bakes in the structural story at play. A reverse DCF at the current price implies an 18% volume CAGR over the next decade (3x of annual power demand growth of 5–6% and in line with the volume CAGR over the past five years). Moreover, if volumes catapult, regulatory risk over transaction fee cuts could emerge – the transaction fees of Europe’s largest exchange, European Energy Exchange (EEX), are one-fifth that of IEX. We maintain our earnings estimates, but roll forward our valuation to Sep’23. We maintain a Neutral rating, with revised TP of INR410/sh (earlier: INR385) on 36x Sep’23E EPS.

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