by A company that is a monopoly in its industry and is the first and largest company in its industry Dividend-Paying, Profitable, No Debt, and Operating Profit Margin is 78%, Return on Equity is 48% and the last 1-year profit is 200 percent.
Can a company be such a strong technically and fundamentally?
The company that I’m going to discuss in this article has almost 95% monopoly in the sector it operates. On top of that, this company has technology as its core competency, so it is basically a technology company that has a 95% monopoly in the market. The company I’m going to discuss is Indian Energy Exchange but is it really a multi-bagger.
Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.
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Introduction
Indian Energy Exchange Limited (IEX) is the first and largest energy exchange in India providing a nationwide, automated trading platform for physical delivery of electricity, Renewable Energy Certificates, and Energy Saving Certificates. The exchange platform enables efficient price discovery and increases the accessibility and transparency of the power market in India while also enhancing the speed and efficiency of trade execution.
Established in 2008, the Indian energy exchange is the first and the largest in India that provides an automated trading platform for physical delivery of electricity, renewable energy certificate, and energy-saving certificates. This might sound a bit complicated to many of you, as the energy exchange business is not common.
In August 2016, IEX received three ISO Certifications – ISO 9001:2015 for quality management, ISO 27001:2013 for Information security management, and ISO 14001:2015 for environment management.
Fundamental Analysis of IEX
Fundamental Analysis of IEX are as follows:
Business Model
The IEX is a Power Exchange, licensed by the Central Electricity Regulatory Commission (CERC) for spot trading in power/electricity and trading of Renewal Energy Certificate (REC) and Energy Saving Certificates (ESCerts). The main activity of the company is to provide an automated platform and infrastructure for carrying out t trading in electricity units for physical delivery of electricity.
- While there are two more companies in their industry Power Exchange of India and Pranurja.The IEX is a Power Exchange, licensed by the Central Electricity Regulatory Commission (CERC) for spot trading in power / electricity and trading of Renewal Energy Certificate (REC) and Energy Saving Certificates (ESCerts).
- The main activity of the company is to provide an automated platform and infrastructure for carrying out t trading in electricity units for physical delivery of electricity.
- So around 2003, the electricity bill was passed in India, after that the power supply and power consumption in India had increased a lot.
- India became the world’s top three power consumption country.
- After this, in 2008, he got permission from IEX that he could bring such a platform where online sale purchases could be done.
- You can buy power by coming online. Consumers can buy power and here you bet price auction will take place, there is a time slot of 15 minutes and then the price is decided according to their algorithm and then the order is placed and then physical delivery takes place.
- Who is the power supplier, manufactures power for companies like NPCL.
- Who is a power consumer-like Textile Industry, Cement Factory?
- State Board and whose power consumption is more than 1 MW, can come to this exchange and buy power.
- Now power suppliers can also buy sales directly to their consumers by making a power purchase agreement.
- That power purchase agreement used to be of 20 -25 years earlier but now you can buy short term also by coming on the exchange because we have seen that on NSE, BSE you can buy a share and on MCX you can buy a sale of a commodity, in the same way, IEX came where you can buy power.
- In India, only 5% of the sale is done through the exchange of power. But in a developed country like the UK, 47% of power is purchased through the exchange but this gap is getting felt soon because India is very fast growing in the power industry.
- The trading volume on the exchange itself has grown by over 74%. Apart from this, there is a consumption of 1.3 trillion kWh of electricity in India in 1 year.
- Apart from this, the new policy that came last year is the National Electricity Policy in which the target of 25% of the market is targeted by the government.
- The government is focusing a lot on renewable energy, currently, the renewable energy installed power comes to 100 GW, while the plan is to increase it to 500 GWh by 2030.
- Apart from this, the electricity generated from thermal production is 67% and by 2035 the target is to go up to 30% and India is focusing more on renewable energy and clean energy and India is focusing that manufacturing to be a hub due to this, the consumption of electricity in India will increase very much.
Product Segments
Products Segments of IEX are as follows:
Day-Ahead Market
- Their first product is Day-Ahead Market,
- if you need a power supply after 24 hours, then you can apply by coming to Day-Ahead Market.
Term Ahead
- The second segment is Term Ahead, if you need power after a week after 1 month or at any option then you can apply in the term ahead.
Real Time
- The third product is real-time, if you want their service immediately, then you can apply in real-time although there is a break of 1 hour after 1 hour you will get a power supply.
Green Term Ahead
- After that their fourth term is Green Term Ahead, when you have to use green energy, you have to use renewable energy, then you can do it by coming in this segment.
Renewable Energy Certificate
- Their 5th product is the Renewable Energy Certificate. Some companies have complied with the government that they have to use so much renewable energy.
- If that company is not able to meet the demand government, then they can come on this platform and buy renewable energy certificates to avoid penalties.
Energy Saving Certificate
- Similarly, their sixth segment is Energy Saving Certificate Compliance on Government Companies that you use Energy Saving Equipments.
- If you do not do that, then come from here and buy the certificate. There are some Uber achievers who achieve more, they have a limit but they use more than that, they can convert it into a certificate and sell it here on the exchange and buy that certificate from those who are underachievers.
Gas Exchange
- The seventh segment is the gas exchange which they launched in 2020 itself.
- Apart from this, this is a full tech-based company, uses AI tools, and is using the latest technology and now it has also come in gas exchange and is about to launch new things.
IEX Leadership
- If you look at the leadership of the company,
- Mr. Satyanarayan Goel is the Executive Chairman and Managing Director of the company since February 19, 2021.
- He has over 40 years of rich experience in different areas of the power sector. He was also actively involved in various reform initiatives of the government of India.
- He was also associated with NTPC limited for 29 years and retired as an Executive Director.
- Overall, the company has a very unique business model of operating as an energy exchange platform, and it has various products in the category.
- The leadership of the company has a rich experience. However, the original promoter of the company was Mr. Jignesh Shah, and he was involved in financial fraud and in 2014, the control was taken over from him.
- Although IEX’s current management is clean, its promoter was involved in unethical practices in the past.
Revenue Breakup
How does this company earn?
- 80 percent of its revenue comes from transaction fees.
- Like if you do buying, selling, on Motilal Oswal, then he deducts some amount of commission from you.
- Because they are providing you trading platform, in the same way, IEX also charges and apart from this.
- IEX has annual charges, maintenance charges are also there, this company earns 20% of their amount through this.
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- Promoter holding is zero in Indian Exchange Energy, those who started this company had legal cases against them,
- due to which they sold their promoter holding, due to which the promoter holding in this company is zero.
- Recently insider selling was seen more in this company. Because insiders sold their stakes. But insiders have sold their stakes very little.
- For example, the Director of Strategy has sold 4.7 percent. But it is also worth noting that no purchases have been made in the last 1 year
- so it can be concluded here that the price of this stock may be overpriced.
- But now is not the time to take an entry, you can book profit by selling now.
- But their insiders have sold very few stakes, the company’s investor is 60% institutional. Foreign Institutional Investors, Domestic Institutional Investors.
- Foreign Institutional Investor If investing in a company when they are looking to grow that company.
- This company is growing definitely because this company has the first seal advantage, so this company is getting the benefit.
- Companies like Fidelity TVS have also invested a good amount in it.
- As you know, India has become a power surplus country, as if they have power in head plus, then they come to these exchanges to sell it.
- So more suppliers are there and more anklets are there, because of the competition, the competition is available because the chief has to buy power there.
- But if the power supply is less then the power generator may not come on the exchange.
- This too could be a red flag for us.
Regulator of Indian Energy Exchange
SEBI is there to regulate NSE and BSE. Similarly, to regulate the IEX, there is the Central Electricity Regulatory Commission, which is coming up with new laws. To regulate power industry and power exchange.
Market Coupling
The first law is market coupling. What happens now, If we want to buy a share, then we will first go to Zerodha’s app. We will place the order there then Zerodha will place the order on NSE and BSE there the price is decided by looking at the demand and supply. This is how we bid on Motilal Oswal or any other brokers but price discovery happened on NSE and BSE, But in the case of IEX, we are doing the same bidding, and price discovery is also happening.
So CERC wants that the price discovery should be done by some other agency of the government. Because of which what could happen. that the monopoly which is IEX’s should decrease a little and the competition will increase.
Market Based Economic Dispatch
- Their second law is Market Based Economic Dispatch.
- The agreement of its According Purchase should be on the market price.
- If it is less than that, then the buyer who is the seller should settle it offline, this is a new law.
- Due to these two laws, power exchange IEX will actually benefit directly and a little bit of competition will also increase.
Company Financials
- This company has outperformed the capital market quite well.
- If we compare it with the capital market because we should compare industry to industry
- If we compare with the capital market, it has outperformed a lot.
- The cooperative profit margin is 78%, return on equity is 48%.
- Return on capital is 67%, profit growth is 16%.
- Its price-earnings ratio is 76% and it’s a bit of a red flag because it’s overpriced, Which is much higher than the capital market, so this stock is overpriced right now.
- But it is not from now, it is from last 1 year still rally remains in it.
Revenue
If you look at the revenue growth since March 2011, IEX revenues have grown from rupees 36 crores to the level of 291 crores by December 2020 that’s a growth of 25.8%. the profits have grown from rupees 19 crores to 197 crores at a CAGR of 27%. Overall, the historical growth has been fantastic. Hence, on growth ratio, I would rate 10 on 10.
Operating Profit Margin
If you look at the operating margin of the company, it is exceptional. It is consistently above 50%. In fact, the recent operating margin is 80%. This clearly suggests the lean structure of the company and its core competency as a technology-based solution provider that reduced the cost and hence brilliant operating margin of 80%.
ROE and ROCE
Its ROE and ROCE for the last 10 years are consistently great. The recent ROE and ROCE stood at 48% and 67% respectively, which is simply brilliant.
Debt to equity ratio
If you look at the debt to equity ratio company has zero debt that makes it a debt-free company. Hence on debt to equity, I would rate 10 on 10.
Reserves
The reserves of the company have increased from 48 crores to rupees 451 crores, which is great. Overall the company is looking financially very strong.
What is the reason for the rally?
- Indian Exchange of Energy has given 200% return in last 1 year.
- Has given a return of 40% in the last 1 month, the first reason is that the trading volume is increasing very much.
- Indian Exchange of Energy Board has seen a growth of 74% since last 1 year.
- CERC has allowed Tata Power, Adani Power, which is a very big power supplier in India.
- If they come on the exchange, then the power supply will increase, the price will be low and the consumption will be high.
- That is why its share price is increasing because who will get the benefit directly,
- There is only one exchange where there are so many suppliers and so many buyers.
- That’s why its price is increasing very much.
- NSE has also included this stock in its future and options segment, so this can also be a reason for the rally.
- Just as the power consumption and power supply from India are in a favorable condition, IEX will get the direct benefit.
- Because there is no competition far and wide, so it can go even around 700.
Future Growth Prospects of IEX
Now, let us look at some Future Growth Prospects of Indian energy exchange. The first plan is
New Product Launches
As we discussed, the Indian energy exchange has many product segments where you can trade electricity for the next day or up to 11 days or even in real-time, then you can also trade renewable energy certificates and energy saving certificates. Indian energy exchange is continuously launching new products to widen its reach and increase penetration.
For example, the Indian Energy Exchange has recently launched cross-border trade, where neighboring countries in the South Asian region can trade electricity on this platform. So it is increased its reach to the entire South Asian region.
The company is also planning to introduce a green market where it will enable the trading of renewable energy on the platform. If it gets approved by CERC, then it would generate additional revenue for the company and renewable energy is the future.
Better rates from exchange
The second plan better rates from an exchange. One of the major reasons for the adoption of energy exchanges would be the cost-saving factor.
Since anyone can come and bid for the electricity in real-time. This provides a great opportunity to buy electricity when it is available at lower rates.
For example, during the lockdown in March and April 2020 the electricity was available at a very low rate on the Indian energy exchange. In one of the reports, the alignment mentioned that companies saved crores of rupees by trading electricity on the IEX platform.
In other news, Maharashtra income that is electricity distributors started buying energy from IEX and saving a lot of money.
Launch of IGX
Next is the launch of IGX. IEX has also launched a platform, called IGX which is the Indian Gas Exchange, it is the first gas exchange platform in India it will facilitate the trading of physical gas.
If you look at the exchange market as a percentage of total demand power market in developed countries is in the range of 30 to 50% whereas, in India, it is only 5%. On top of that, the share of exchange in short-term trade is just 5.2%.
Currently, there is very low usage of exchange platforms for power trading. This is mainly since there is a long-term contract between power companies like NTPC and distributors, it could be as long as 25 years.
However, Government is planning to introduce MBED that is Market Based Electricity Dispatch, where the power generators and distributors would have to come to the exchange platform to trade. If that happens, it would boost the growth of power exchange in India to almost 8 to 10 times in the next few years.
Key Risk
So far we discussed the growth prospects and positive side of the company but now let’s discuss the key risk. The biggest risk for Indian Energy Exchange is the risk of losing its monopoly.
How can IEX lose its monopoly? As we have discussed earlier, IEX is regulated by the Central Electricity Regulatory Commission (CERC). Now CERC is concerned with the monopoly of IEX in the country, obviously, a monopoly is not good in any market.
You need competition for the overall market to thrive. Hence, CERC has recently introduced ‘Market coupling’ in spot power trading, please read it very carefully.
We already discussed the business model of IEX where we learn that the Indian Energy Exchange facilitates order matching, where buyers and sellers bits are matched, as well as price discovery, where the IEX algorithm decides the right price based on supply and demand both happen on the platform.
However, with market coupling, this order matching, and price discovery would be done by a third party. Hence, after ‘Market coupling’ buyers from other platforms would be able to buy from sellers on the IEX platform. Likewise, buyers on the IEX platform can buy from sellers on another platform.
As of today, IEX had the monopoly because it had the maximum number of buyers and sellers, and it was able to provide electricity at a competitive rate, but after ‘Market coupling’ it would lose this monopoly. As there won’t be any cost incentive for buyers and sellers to use the IEX platform.
This would also open up the market for other players to enter and IEX would lose its monopoly but since the overall size of the energy exchange market is expected to grow, IEX would benefit from it.
Even though the pie size of IEX in the market would reduce due to ‘Market coupling’ the overall pie of the market would increase. Hence, on future growth prospects, it is a mix of both growth for the company, but at the same time, there is a risk of losing the monopoly.
Conclusion
Overall if we conclude the fundamental analysis of IEX has an excellent business and its management, strong competitive advantage, and good financial and bright growth prospect which makes it a fundamentally good company.
It is currently available at a fair valuation due to correction in the market. What is your take on the fundamental analysis of IEX have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.
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