India Energy Exchange IPO Opens: Analysts Give Thumbs Up For Long Term Gains

Indian Energy Exchange, country’s biggest and first exchange for trading electricity has opened for initial public offer (IPO) today (9 October), with price band of Rs 1,645-1,650 per share.

The company’s financials have grown at a strong rate with sales and net profit have growing at 14.5 per cent annually between FY13 and FY17 to Rs 237 crore and Rs 114 crore respectively. The majority analysts have given their thumbs up to ‘Subscribe’ at the back of certain factors.

1. Dominant position

Among the two exchanges currently operating in India, IEX dominates the space with >93.5 per cent volume market share, while Power Exchange of India (PXIL) accounts for the rest.

IEX has been able to maintain its dominant position, owing to: (i) adoption of robust technology platform to facilities seamless trading; (ii) market development initiatives; (iii) domain expertise. We believe that on the back of robust technology platform and continuous initiatives towards development of power market, IEX would maintain its dominant position, going ahead, according to Reliance Securities.

2. Surge in short term market

The short‐term market has provided the distribution companies with the option to hold a mix of long‐term and short‐term contracts and optimize the overall power‐ purchase cost. Subdued demand for power in the past three years, combined with a lag in long‐term capacity contracting has pushed generators to sell their surplus power in the short‐term market.

3. Reforms push - Saubhagya/Power for all/UDAY

The Government of India’s 24x7 “Power for All” scheme aims at providing all households and industries access to electricity. Initiatives such as ‘Power for All’, along with rural electrification and the ‘Make in India’ initiative aim to increase per capita consumption in India, which at 1,075 kWh, is among the lowest in the world. There is significant potential for volume growth considering this low per capita consumption. A part of this demand is expected to come to the short‐term market; propelling electricity trading further, anticipates Prabhudas Liladhar.

Apart from this, the other schemes initiated, including UDAY, improvement in the transmission infrastructure, open access policies will benefit the exchange further.

4. Strong financials - Recommended

IEX has a decent set of financials - revenue and PAT CAGR of 14 per cent and 12 per cent, over FY13-17, with healthy EBITDA margins of 72 per cent, positive free cash flows over the period, high RoE 40 per cent,” states Centrum Broking, a stock broking Research Company.

“Given the dominant market share, healthy financials, stable growth, the IPO could garner interest in the current market environment,” the report added.

“At a price band of Rs 1,645-1,650, the Issue is valued at 43.5x FY17 EPS. Its revenue, EBITDA and PAT has witnessed 18.7 per cent, 17.3 per cent and 12.3 per cent CAGR, respectively through FY15-FY17. As IEX enjoys a dominant position in Indian short-term power market electronic platform, we believe that IEX would continue to deliver higher revenue and profit given the strong growth potential,” adds Reliance Securities.

The brokerage house KR Choskey Securities mentions that the issue’s valuation is at premium, primarily on account of the company’s dominant presence, which is reflected in strong financial performance over FY13-17.

“We believe strong business outlook owing to increase in the short term power volumes on exchange to benefit the players like IEX and hence we recommend SUBSCRIBE rating with a view of medium to long term perspective,” the brokerage house said in its report.