Indian Energy Exchange IPO (IEX IPO) Review

Indian Energy Exchange ( IEX IPO )Indian Energy Exchange IPO (IEX IPO) comprises sale of 6,065,009 equity shares by existing shareholders including Tata Power Co. Ltd, Aditya Birla Group’s private equity arm , Madison India Capital and Multiples Alternate Asset Management Pvt Ltd. Indian Energy Exchange Ltd (IEX) Incorporated in 2007, is a ‘power exchange’ offering trading in a
range of electricity products in India. IEX is India’s largest exchange in electricity products trading and provides an online trading platform which is accessible to registered participants. It promotes efficient price discovery and the opportunity to trade in a variety of electricity products.

Indian Energy Exchange IPO (IEX IPO) Details
Issue Period Monday, Oct 9, 2017 – Wednesday, Oct 11, 2017
Issue Size ( in Rs.) 1,001 Cr
Issue size (in Shares) Offer for sale of 6,065,009 Equity Shares.
Price Band Rs.1,645 – 1,650
Bid Lot 9 Equity Shares and multiple thereof
Issue Structure :  
QIB 50% of the Offer- 3,032,503 Shares – 500 Cr
NIB 15% of the Offer – 909,752 Shares  – 150 Cr
Retail 35% of the Offer – 2,122,754 shares -Rs. 350 Cr
Applications for 1x Retail subscription 2,35,861
Lead Manager Axis Capital, Kotak Mahindra Capital, IIFL Holdings
Registrar Karvy Computershare Pvt. Ltd.
About Indian Energy Exchange (IEX)
  • The company was incorporated as Indian Energy Exchange Limited on March 26, 2007 as a public limited company.
  • Electricity  products  traded  over  IEX trading  platform  comprise  of 
    1. Electricity contracts in blocks of 15 minutes in the DAM
    2. 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)  and 
    3. Renewable  energy  certificates  (RECs)
  • Indian Energy Exchange Ltd. (IEX)  is the largest exchange for the trading of a range of electricity products in the country and holds 99.4% market share of electricity contracts in the day-ahead-market (DAM), 67.9% in term-ahead-market (TAM) and 71.2% in Renewable Energy Certificates (RECs). 
  • Indian Energy Exchange(IEX)  has  more than 5900 registered participants, 400 generation companies,  50 DISCOMS and more than 3900 open access consumers. 
  • Indian Energy Exchange Ltd. is a professionally managed company and does not have an identifiable promoter in terms of the SEBI Regulations and the Companies Act.
  • Indian Energy Exchange revenues and reserves are invested in a portfolio of assets comprising bonds and mutual funds. For the financial years 2015, 2016 and 2017 and for the three months ended June 30, 2017, its interest income, dividend income and profit on sale of current investments (including training income), collectively accounted for 17.9%, 12.5%, 14.1% and 9.8% of its total revenues, respectively
  • IEX was funded by a clutch of PE investors.. While some investors are selling / paring their stake, Dalmiya Cement Bharat and TVS Capital who own 15% and 10% stake  in the exchange. Other will continue to remain invested i
IEX IPO: Financials
 (Rs. In Cr)
  Q1Fy18 2017 2016 2015 2014
Revenue from Operations 55.47 203.91 175.03 144.78 152.57
Revenue Growth (%) 16.50% 20.89% -5.11%
Profit Before Tax 46.86 173.21 146.63 132.51 132.87
Net Profit  30.63 113.57 100.34 90.02 91.95
Net Profit Margin 55.22% 55.70% 57.33% 62.18% 60.27%
Equity Share capital 29.12 28.81 28.81 27.3 27.3
Compulsory Convertible Preference Share Capital 1.21 1.52 1.52 3.03 3.03
Share Capital 30.33 FY18 30.33 30.33 30.33
Reserves 275.3 244.66 240.61 209.62 222.56
Net Asset Value (Rs.) 104.55 94.92 93.51 86.8 91.54
Net worth 305.62 274.99 270.94 239.95 252.88
RoNW (%) 10.02% 41.30% 37.03% 37.52% 36.36%
Face Value 10        
EPS (Rs.) 10.66 37.78 34.01 29.47 33.67
IPO Price (Rs.) 1650        
PE ratio (FY17) 43.67
P/BV ratio 5.40
CAGR Sales 3 yrs 10.15%
CAGR NP  3 Yrs 7.29%
Market Cap (Rs. Cr) 5004.45
Market Cap/Sales  24.54
IEX IPO: Rationale for Investment
  • Country’s need for energy is increasing as a result of economic growth and modernization over the past several years. India presents a fast growing domestic market with conducive Government policies and regulations
  • The Indian power market consisted of 89.7% of long and medium term electricity contracts (contracts for periods of one year or over) and 10.3% of short term electricity contracts (contracts for periods of under one year) for the financial year 2017,The short term market for electricity contracts includes contracts through licensed traders, direct bilateral contracts, deviation settlement mechanism (“DSM”) and contracts traded over power exchanges, which accounted for 28.1%, 17.9%, 19.5% and 34.5% of the short term market for electricity contracts, respectively.
  • As per Central Electricity Regulatory Commission(CERC) the share of electricity contracts traded over power exchanges has grown from 23.8% to 34.5% of the short term market between the financial year 2013 to the financial year 2017.
  • In recent years,the regulator i.e. CERC has also increased the penalties imposed on power generation and distribution companies for unscheduled drawl and injection of electricity, which has encouraged such companies to manage their short-term power requirements through the power exchanges
  • Indian Energy Exchange is the first and largest energy exchange in India with strong brand recognition and has achieved deep penetration of the market for trading of electricity over exchanges, and as of August 31, 2017,it 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 IEX included over 1,000 renewable energy generators and over 2,900 industry and corporate customers.
IEX IPO: Concerns
  • With respect to short term market conducted over power exchanges, Indian Energy Exchange faces competition from Power Exchange India (“PXIL”), traders and the DEEP Portal launched by the Ministry of Power, Government of India.
  • Indian Energy Exchange depends on a limited number of participants for a significant portion of our revenue, and any decrease in revenues or trading volume from any one of our major participants may adversely affect IEX. 
  • IEX is vulnerable to regulations notified by the Central and State Electricity Regulatory Commissions SERC and CERC from time to time.
  • IEX is seeking a market valuation which is significantly higher than the valuation at whch Reliance Infrastructure in Dec 2016 sold its ~4% stake in the company ( at Rs. 2500 crore market valuation against Rs. 5000+ crore valuation sought through the IEX IPO)
IEX IPO: Assessment
  • The current product portfolio on power exchanges focuses on short-term demand of electricity in the country. The share of Short term market in overall market is likely to grow due to plethora of factors and is expected to reach 21% in five year period. Further volumes in the short‐term electricity market are expected to increase at a CAGR of 20% in next  five  years and  share  of  exchanges is this is expected to rise to  rise  to  43%. 
  • IEX and PXIL are the two power exchanges which provide short-term trade of power in India.Indian Energy Exchange(IEX) is way ahead with its share in total volume traded through exchanges averaging at ~93.5% in last five years.
  • IEX has consistently expanded its participant base yoy from 2,893 in FY13 to over 5,900 registered users at the end of Aug 31, 2017. 
  • IEX has registered total revenue & Profit  CAGR of ~1 15% in the period FY13-17 mainly driven by 15.5% CAGR.
  • Indian Energy Exchange plans to expand its geographic markets to neighbouring countries.
  • IEX growth prospects are mainly driven by the factors like opportunity in short term Indian power market, large diverse customer base and attract new participants, increase trading activity, expand into global markets, develop new products and services and provide latest technology platform for trading.
  • IEX enjoys ~75% EBIDTA margins and 56% Net profit margins which are quite decent. Though strictly not comparable these numbers are higher than commodities exchange MCX and stock exchange BSE. PE multiples at 44X  are near to MCX (45x)
  • Indian Energy Exchange(IEX) scale of operations as the largest energy exchange in India, coupled with the growth expected in the short term electricity market, increasing number if stake holders and participants in Indian Power sector bodes well for the company.
  • The share of power traded in exchanges in India stands ~3% compared much higher numbers in range of 20-30% in developed nations, leaving ample scope for growth of the sector and the company
  • I am reminded of the fact that through Indian Energy Exchange is a different type of exchange with superior margins, the performace of two listed exchanges ie.MCX and BSE on the stock exchanges has not been very exciting.
  • The post issue money market cap  works  out  to  be  Rs 5004 crore and Indian Energy Exchange IPO ( IEX IPO) is priced at 44x FY17  earnings which is not cheap. Looking into all aspects and its overall prospects, I intend to subscribe to IEX IPO with a medium/long‐term perspective whilst the listing gains or loss is totally dependent on interest of market players. Some degree of caution is warranted in this IPO and one needs to keep a watch on subscription figures. Fate of IEX IPO largely hinges on  institutional investors as there is little activity so far on the grey market in IEX IPO.  I expect a reasonable to good demand to the IPO from the institutional investors. However investors looking for listing gains alone should keep a watch on subscription figures.
  • 11/10/17: Iam inclined to put 2-3 applications in IEX IPO. Would be watching institutional response keenly. Poor response from HNI is expected. So far institutions have not come in. At this stage chances of listing gain are dim. 
  • 11/10/17 : some tweaking in FII portion of anchor book. Seems they cannot invest further in IPO and can buy on listing only. Not good on last day.  Just put in one application only.
  • In case of any change/update in my opinion. same shal be intomated here before IEX IPO ends

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.

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