Markets
Robust power demand charges IEX stock, aids earnings outlook
Summary
- IEX is on track to exceed its annual volume growth guidance, driven by an increase in electricity volumes.
- IEX's expansion into renewable energy certificates, natural gas trading, and its venture into carbon trading positions it for long-term growth.
Shares of Indian Energy Exchange Ltd (IEX) surged to a new 52-week high of ₹211.25 on the National Stock Exchange on Thursday. Powering the Street’s optimism is significant volume growth of 12,040 million units (mu) in August, including certificates, marking a 36% year-on-year increase. Electricity volumes rose 17.1% year-on-year to 9,914 mu last month, putting IEX on track to surpass its annual volume growth guidance of 17-18%.
IEX operates a power trading platform that matches short-term power demand and supply, ranging from same-day transactions to contracts for up to three months. Power exchanges have become crucial to meeting the economy’s electricity needs as the market shifts away from long-term purchase agreements to shorter-term contracts.
Read this | What's behind India's surging hunger for electricity?
For context, power traded through exchanges recorded a 17.5% compound annual growth rate (CAGR) between FY19 and FY24, far outpacing the 5.1% growth in consumption during the same period, according to the Central Electricity Regulatory Commission. The near-term outlook remains robust, supporting IEX’s growth prospects.
Elara Securities expects an earnings CAGR of 15.6% for IEX during FY25-27. Ebitda growth was strong, with a 22% year-on-year increase in Q1FY25 and 17% growth for FY24.
The renewable energy certificate (REC) market is another growth driver for IEX. Generators receive RECs for renewable power generation, which are then bought by various market participants. The REC market got a boost in April 2023 when the floor price was removed, enabling market-driven price discovery. Although prices have fallen from ₹1,000 to ₹115 after the amendment, volumes have surged fivefold to 5.2 billion units in the first two months of Q2FY25. In Q1FY25, REC volumes had doubled year-on-year to 2.1 billion units.
IEX has also ventured into natural gas trading with the formation of natural gas exchange (IGX). IGX's share in the overall gas consumption is expected to increase from present 2% to 4-5% by 2030. Additionally, IEX has formed an international carbon exchange to facilitate carbon trading, though this segment is awaiting regulatory clarity.
However, IEX’s near-monopoly status faces challenges. The electricity regulator is undertaking various simulation to integrate certain other market segments, which could reduce IEX's share in the market, which is about 84% in total electricity traded, despite the presence of three exchanges.
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Meanwhile, in the last one year, the IEX stock is up 52%, beating the Nifty500’s 38% returns, aided by a strong profitability outlook. On the valuations front, the stock trades at FY25 EV-to-Ebitda of 37x and price-to-earnings of 45x. This multiple needs to be backed by consistent earnings growth.
