Indian Energy Exchange Ltd- IPO NOTE

Report By:- Apeksha Shetty

India’s first Power Exchange is all set to launch an IPO of Rs. 1000.72 Cr. Indian Energy Exchange Ltd. (IEX) is India’s premier power trading platform. Providing an automated platform for physical delivery of electricity, IEX enables efficient price discovery and offers participants the opportunity to trade in a variety of energy products. The exchange platform increases the accessibility and transparency of the power market in India and enhances the speed and efficiency of trade execution.

The details of the IPO are analysed below:

Offer Details

Issue Size: Offer for Sale of 6,065,009 Equity Shares of Rs 10 aggregating up to Rs. 1000.72 Cr

Opening Issue Date:  Oct 9, 2017

Closing Issue Date: Oct 11, 2017

Issue Price Range: Rs. 1600 to Rs. 1650

Lot Size: 9 equity shares

Face Value: Rs.10 per share

Merchant Banker: Kotak Mahindra Capital Company Limited, Axis Capital Ltd. , IIFL Holding Ltd.

 

Object of Issue

  • Achieve the benefits of listing the Equity Shares on the Stock Exchanges and to carry out the sale of up to 6,065,009 Equity Shares by the Selling Shareholders.
  • The listing of the Equity Shares will enhance the Company’s brand and provide liquidity to the existing Shareholders.

 

Overview of the Indian Power Sector

India is the third-largest electricity producer in the world. The country’s need for energy is increasing as a result of economic growth and modernization over the past several years. India’s per capita electricity consumption has grown from 631.4 kilowatt-hour (“kWh”) in the financial year 2006 to 1075 kWh in the financial year 2016, an increase of 70.2% in 10 years. Between 2006 and 2017, India’s peak demand increased at a CAGR of 5.0% to reach 159.5 gig watts (“GW”); the installed power generation increased from 124 GW to 327 GW at a CAGR of 9.2% during the period. Further, the latest draft National Electricity Plan 2016 projects peak demand of 235 GW at the end of the financial year 2022.

Short term electricity markets in India

Short-term power market covers contracts of less than a year for electricity transacted through:

(i) inter-state trading licensees;

(ii) Power exchanges;

(iii) Directly between distribution licensees (cashless)

(iv)Deviation Settlement Mechanism

 

The volume of short-term transactions of electricity, as a percentage of total electricity generation, has been between 9% and 10% in recent years. In the financial year 2017 total short-term sale of electricity (119 BU) was approximately 10.3% of the country’s generation during the period.

 

Market share of exchanges: IEX and PXIL

 IEX and PXIL are the two power exchanges facilitating short-term trade of power in India. IEX dominates the space, with its share in total volume traded through exchanges at an average of over 93.5% in last five years.

 

Market share of IEX (product category wise)

 

Overview of the Company

Indian Energy Exchange is the largest exchange for the trading of a range of electricity products in India, in terms of traded contract volumes in the financial year 2017 according to the Central Electricity Regulatory Commission (CERC). Electricity products traded over electronic trading platform comprise:

 

  • Electricity contracts in blocks of 15 minutes in the day-ahead-market (DAM)
  • Electricity contracts for fixed terms in the future, such as intra-day contracts, day ahead contingency contracts and contracts up to 11 days ahead, known as the term-ahead-market (TAM).
  • Renewable energy certificates (RECs). The Exchange has commenced the trading of energy saving certificates (ESCerts) on September 26, 2017.

 

It is one of two exchanges in India that offer an electronic platform for the trading of electricity products and have a substantial majority market share among the power exchanges in India. The DAM constitutes the substantial majority of the energy contracts that are traded on the Exchange. In FY16 and FY17, the exchange commanded a 99.6% and 99.4% market share, respectively, of electricity contracts in the DAM, in terms of volume.

 

Business Volumes by product category for IEX

 

As of August 31, 2017, exchange had over 5,900 participants registered of which over 3,200 participants were active. Over 4,300 registered participants were eligible to trade electricity contracts and over 4,000 registered participants were eligible to trade RECs, as of August 31, 2017. The participants registered to trade electricity contracts are located across 29 states and five union territories in India, and include 50 distribution companies, over 400 electricity generators and over 3,900 open access consumers.

In FY17, participants traded and cleared 40,528 million kWh of power on the Exchange. The volumes grew by 77.5% in FY17 from 22,827 million kWh of power traded on the Exchange in FY13. For the five months ended August 31, 2017, participants traded and cleared 19,715 million kWh of power on Exchange.

As of August 31, 2017 in addition to the participants registered to trade electricity contracts, participants registered to trade RECs on Exchange included over 1,000 renewable energy generators and over 2,900 industry and corporate customers. In FY17, participants traded and cleared 4.62 million RECs on the Exchange.

IEX platform is accessible online and is designed to  be  highly  scalable,  such  that  it  can  expand  capacity  and  add new  products  and  functionality  efficiently  and  at  relatively  low cost without disruption to the markets. At the same time, IEX also expect the highly scalable and adaptable nature of the platform to allow them to quickly expand into existing and new geographic markets,  in  particular  states  with  significant  consumption  of power  and  those  neighboring  countries  which  are  electrically connected  to  power  grids  in  India,  such  as  Bhutan,  Bangladesh and  Nepal.

 

Strengths

Efficient price discovery and flexibility on the Exchange
  • The Exchange is an online platform which is accessible by participants throughout India. It promotes efficient price discovery and offers the participants on the Exchange the flexibility to trade in a variety of electricity products.
  • The Exchange primarily brings together sellers of power, such as independent power producers, captive power plants, distribution companies and Government owned power generation companies, and buyers of power, such as distribution companies and industrial, commercial and institutional power consumers, and provides them with a transparent, neutral and automated platform for m trading of electricity.

 

First and largest energy exchange in India with strong brand recognition
  • According to the CERC, in FY16 and FY17, 97.9% and 98.5% of the traded contract volumes of electricity contracts in the DAM and TAM combined, respectively, and 63.3% and 71.2% of the cleared volumes of RECs, respectively, were conducted over the Exchange.
  • In FY17, participants on the Exchange traded and cleared 40,528 million kWh of power and 4.62 million RECs on the Exchange.
  • For the first five months of FY17, participants traded and cleared 19,715 million kWh of power and 0.91 million RECs on the Exchange.
  • The volumes for FY17 represent a growth of 77.5% from 22,827 million kWh of electricity contracts, and growth of 132.0% from 1.99 million RECs traded and cleared on the Exchange in FY13.

Fast growing domestic market with conducive Government policies and regulations
  • According to CRIS, peak demand for power in India is expected to grow at a CAGR of approximately 7.3% from FY17-22, which, in turn, is expected to increase the amount of power that can be traded through energy exchanges.
  • Further, according to CRIS, the power generated in India is expected to grow by 29.6% from FY17-22.
  • The proportion of energy traded over power exchanges grew from 23.8% to 34.5% of the short term market between FY13-17, according to the CERC.

 

Diverse participant base ensuring liquidity on the Exchange
  • As of August 31, 2017, the exchange had over 5,900 participants registered on the Exchange of which over 3,200 participants were active.
  • Over 4,300 registered participants were eligible to trade electricity contracts and over 4,000 registered participants were eligible to trade RECs. The participants registered to trade electricity contracts include 50 distribution companies, over 400 electricity generators and over 3,900 open access consumers.
  • In addition to participants registered to trade electricity contracts, participants registered to trade RECs on the Exchange included over 1,000 renewable energy generators over 2,900 industry and corporate customers.

 

Highly scalable and proven technology infrastructure
  • The trading software which is used is developed by 63 Moons Technologies Limited (“63 Moons”), which is critical to maintain the anonymity of bids, the integrity of the price discovery mechanism, implementation of risk management procedures and catering to the requirements of all pre and post trade functionalities on the Exchange.
  • The trading software is capable of handling complex order types and is also capable of deriving results under the grid condition of power transmission congestion. The trading software is capable of handling 30 price areas across the country, out of which we are currently using only 13 price areas.
  • On May 16, 2017, the company acquired exclusive rights to the source code (together with modification rights) for the trading software from 63 Moons along with the transfer of 22 employees of 63 Moons to the Company for an aggregate consideration of Rs 130.68 crore (including applicable taxes).

Strategies

  • Market development to encourage trading of power over exchanges
  • Attract new participants and increase trading activity on the Exchange.
  • Expand into new geographic markets
  • Develop new products and services
  • Focus on technology including increasing connectivity to the trading platform

 

Risk Factors

  • The business and results of operations may be adversely affected if the company is unable to maintain or grow the volume of the electricity contracts traded on the Exchange and retain the current participants or attract new participants.
    The company derives a significant majority of revenue from
  1. transaction fees, which is earned from participants who execute transactions on the Exchange
  2. annual subscription fees, which are subscription fees charged participants for trading on the Exchange, which combined accounted for 81.56%, 87.05%, 85.48% and 89.95% of the total revenues for the financial years 2015, 2016, 2017 and for the three months ended June 30, 2017, respectively.
  3. As such, a significant percentage of the revenues are dependent on the volume of power traded on the Exchange.

 

  • Information technology system limitations or failures, including the IT maintenance may harm the business, financial condition, results of operations and prospects

 

  • The company is subject to periodic regulatory review by the CERC and any adverse findings or non-compliance discovered as part of such review, may require us to incur additional expenditure to address such findings or non-compliance and may have an adverse effect on the reputation, business, and results of operations, financial condition and prospects.

 

  • The company may have to introduce new products and services to retain and attract participants on the Exchange and undertake market development activities to encourage trading of power products on the Exchange, in the event such products or services are not successful, the business and results of operations may be adversely affected.

 

Legal Cases

 

Financial Analysis

  • Net Worth  (Rs. In Cr)

 

  • Debt to Equity

 

  • Total Revenue and EBITDA  (Rs. In Cr)

 

  • EBITDA Margin and PAT Margin (In %)

  • PAT (Rs. In Cr)

  • EPS

  • Price to Earning

 

  • Total Revenue of the Company has grown at a CAGR of 14.46% from the last five years. And the PAT has grown at a CAGR of 14.40%. Hence, the EPS is in an uptrend and the P/E has gone down from 75.45 in FY13 to 44.03 in FY17.
  • The EBITDA Margin and PAT margins are high which a positive factor is for the Exchange.
  • The exchange has rising Reserves and Surpluses.
  • There is no significant amount of debt.

 

Authors Note

The Exchange has got the first mover advantage in India and it has maximum market share. The exchange is strategically planning to expand geographically (Neighboring Countries) and also introduce new products in the market so that market participants have more options to deal in. The market participants are rising and efforts are made by the Exchange to increase them so that liquidity can be provided to the products.

On valuation front, Indian Energy Exchange shares are priced at 44 times its FY17 earning which is similar to MCX. However, IEX has a return on equity (RoE) of 30.8% compared to 7.4% for Multi Commodity Exchange (MCX). The company has maintained a dividend payout ratio of over 50% since FY15. From the above facts we believe the company has required extremely low level of capital to run the business.

Therefore, we would recommend you to go for the IPO. The company is in a growing stage and we can expect good returns in the long run.