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Why You Should Make Profits on Indian Energy Exchange Stocks

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Indian Energy Exchange (IEX), the market’s leading energy exchange, holds the lion’s share of the short-term (ST) energy market in India.

Shrugging off the lukewarm performance at the start of the year due to the nationwide lockdown, IEX delivered its best performance during FY21. Reflecting the strong performance of the company, IEX stock surged – nearly tripling from 130 per share in March 2020 to 379, pushing valuations higher. Despite the strong financial performance and business outlook, investors can see profits in IEX. After the past few years, the share price has been more than enough in the expected earnings growth of the company.

About the company

Most of the country’s electricity (89 percent) is largely purchased by electric utility distribution services (discoms) under long-term power purchase agreements (PPAs). The ST electricity market, which includes contracts of less than one year, accounts for around 11% of India’s electricity production. Fifty percent of these ST transactions are done through power exchanges, a segment dominated by IEX. These exchanges allow discoms and other wholesale customers to purchase electricity at competitive rates, generally lower than those for over-the-counter purchases.

IEX accounts for 95 percent of the electricity volumes traded on the stock exchange in India. Power Exchange India (unlisted), the other electricity exchange accounts for the rest. Fifty percent of ST electricity trading in India is done through these exchanges. Apart from this, ST electricity trading also takes place through interstate traders such as PTC India, Adani Enterprises and GMR Energy Trading, and directly between discoms.

IEX brings together electricity sellers such as independent power producers, captive power plants and discoms and buyers such as discoms and industrial and commercial consumers on an automated trading platform for transparent price discovery for the physical delivery of electricity.

IEX operates in six different market segments, including one for the trading of renewable energy certificates and energy saving certificates. The day-ahead trading market facilitates the buying and selling of electricity for next day deliveries. The futures market facilitates this for different terms for a period of up to eleven days in advance. The Real Time Market (RTM), which began operating in June 2020, allows electricity to be traded for deliveries in less than an hour. The green futures market (GTAM) launched in August 2020 facilitates trading in renewable energies.

A large portion of IEX income comes from transaction fees which are charged based on the volume of transactions made on the exchange. An increasing volume of electricity trading on the stock exchange is therefore the key to revenue growth. As the near-term electricity market grows, power exchanges, particularly IEX, are well positioned to capture a piece of this pie.

This will happen as more and more discoms resort to purchasing more electricity from the exchanges instead of relying solely on the more expensive electricity contracted under long-term PWA. . As IEX is preparing to launch two new segments, long-term delivery contracts and the integrated green day-ahead market, these still need to be approved by the sector regulator.

While not a near-term threat, investors are very careful about competition from a new power exchange from Pranurja Solutions (backed by PTC India, BSE and ICICI Bank).

Financial performance

The volume of short-term electricity trading in India increased from 115 BU in FY16 to around 140 BU in FY21 (until January). Over the years, the volume of electricity traded on IEX has also increased steadily, from 34 BUs in FY16 to 74 BUs in FY21. In accordance with this IEX, operating revenue increased 12.7% CAGR over the past five years to reach 318 crore by FY21. Supported by lower operating costs, IEX increased its operating profit to 14 percent CAGR to 234 crore and its net profit to 15.4 percent CAGR to 206 crore during this five-year period. This was helped by the impressive show from IEX in fiscal year 21. It posted operating revenue growth of 23.6%, operating profit growth of 25.3% and a 17.3% net profit growth in fiscal year 21 compared to fiscal year 20. Growing electricity consumption with the resumption of economic activity, competitive prices on the stock exchange and the launch of RTM and GTAM boosted IEX performance

Valuations take precedence over growth

Despite the recent financial performance of IEX and the outlook for future growth, investors may be cautious. After the rally, at 379, the stock is trading at a 12-month P / E of 55 times. This is significantly higher than its historic 3-year average P / E multiple of 33.5 times. Even assuming 24 percent and 16.5 percent earnings growth in FY22 and FY23 (Bloomberg consensus estimate), respectively, the one-year forward P / E multiple is 43 times.

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