Spot power prices hot, Indian Energy Exchange’s shares cold
Investors in the Indian Energy Exchange are not sharing the excitement in the spot electricity market, as the stock still trades below its IPO price of ₹1,650
Spot electricity markets are humming with activity and volumes at the Indian Energy Exchange Ltd (IEX) are growing in double digits. But investors in the exchange are not sharing this excitement, and the stock still trades below its initial public offering (IPO) price of ₹1,650. The stock has more or less mimicked the BSE 500 index since listing.
One possible reason could be valuations, as the stock trades at about 30 times current fiscal year’s (FY19’s) estimated earnings. Profit increased by 16% in FY18, compared to the previous three-year average growth of 7%. Brokers estimate profit growth this year at 23%, according to Bloomberg data.
The mandatory lock-in period for the pre-IPO investors ends on 17 October, according to Jefferies India Pvt. Ltd. The prospect of selling by this category may be an overhang. Another headwind could be competition. PTC India Ltd, an electricity trader, is working to set up an energy exchange. Also, as pointed in this column some time back, there are concerns about the pace of expansion in the short-term power market.
Even so, volume growth remains strong. IEX’s sales volume rose 26% in FY18 and 22% in the first quarter of FY19. Monthly data shows a 16% rise in day-ahead market volume in the September quarter. Higher temperatures and increased demand from residential and agriculture sectors are keeping prices and volumes elevated in the spot markets. Volume in the day-ahead market till 16 October are up about 67%.
However, volumes may cool a bit as winter sets in. But a steady rise in demand and increasing volatility in electricity generation (due to plant shutdowns and variability in renewable power generation) should help IEX. According to Jefferies, the company aims to gain share from other licensed traders.
With regulator Central Electricity Regulatory Commission (CERC) clarifying on pricing, a steady volume growth should support IEX’s earnings.
“State Electricity Boards approached CERC to review IEX’s transaction charges. This led to concerns on CERC regulating exchange tariffs and lowering pricing. However, CERC has passed an order stating that only a change in price needs its approval,” add analysts at Jefferies India.
Even then, investors are attaching little importance to the seemingly positive outlook. The stock has lost 4% last month compared to a 10% decline in the BSE 500 index. That indicates relative outperformance. For this to carry through to the longer run, investors may need more triggers.
A policy breakthrough could provide one. Exchanges offer short-term contracts now whereas power utilities prefer longer-duration ones. Another area is in open access. High volume users of electricity are allowed to purchase power directly. But states discourage it by imposing charges. Improved regulatory awareness can alter this. Structural changes such as these are required to turn the tide in IEX’s favour.
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