CM RATING

46/100

Incorporated in 2008, Indian Energy Exchange (IEX) is a professionally managed company and is the largest exchange for trading of range of electricity contracts in India in terms of traded contract volumes in FY 17, according to Central Electricity Regulatory Commission (CERC).

Electricity products traded over its electronic trading platform comprise (i) electricity contracts in blocks of 15 minutes in the day-ahead-market (DAM), (ii) 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 (iii) renewable energy certificates (RECs).

IEX holds 99.4% market share in DAM, 67.9% in TAM and 71.2% market share in RECs in terms of FY 17 volumes.

IEX does not own or trade electricity products for on its own account. It 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 trading of electricity. In addition to trade execution, the exchange also offers settlement services, including electronic trade confirmation, access to clearing services and risk management facilities. Trading on IEX is done by its members on their own behalf and on behalf of their clients, who are together known as participants on Exchange.

The company has been able to consistently increase its participant base from 2893 in FY 2013 to over 5900 at the end of August 2017. Over 3,200 participants as of August 2017 are active and located across 29 states and five Union Territories and include 50 distribution companies, over 400 electricity generators and over 3,900 open access consumers. As on Aug 17 IEX had over 1,000 renewable energy generators and over 2,900 industry and corporate customers. In FY 2017, participants traded and cleared 4.62 million RECs on Exchange.

According to CERC, the Indian power market, in terms of electricity generated, consisted of 89.7% of long term and medium terms electricity contracts (contracts for periods of one year or over) and 10.3% of short term electricity market (contracts for periods of under one year) for the FY 2017. The short term electricity market includes contracts through licensed traders, direct bilateral contracts, deviation settlement mechanism (DSM) and contracts traded over power exchanges.

According to CERC, the share of electricity contracts traded over power exchanges has grown from 23.8% to 34.5% of the short term market between FY 2013 and FY 2017.

IEX has commenced the trading of energy saving certificates (ESCerts) on the exchange on September 26, 2017.

The Offer and the Objects

The offer comprises of offer for sale of 60.65 lakh shares by selling shareholders, which at lower price band of Rs 1645 per share, works out to Rs 997.69 crore and at higher price band of Rs 1650, the issue size works out to Rs 1000.73 crore.

The selling shareholders comprises institutional investors such as Aditya Birla Private Equity fund, AF Holdings, Golden Oak (Mauritius), Lightspeed Venture Partners, Madison India Opportunity fund, Multipes Private Equity fund apart from Tata Power company and individual investors namely Jayant Deo and Kiran Vyapar.

The minimum bid lot is nine equity shares and in multiples of nine equity shares. The issue is made through the book-building process and will open on 9^th October and will close on 11^th October, with anchor investor bidding date of 6^th October 2017.

The objects of the issue is to achieve the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

According to Crisil Research, the short-term electricity market in India is expected to grow to 21.1% of electricity generated in India by the FY 2022, of which 43.0% is expected to be traded over power exchanges as compared to 34.5% for FY 2017.

Only 3.6% of renewable power generation energy is traded on Indian power exchanges against 30 to 70% trades on global power exchanges. With governments focus on renewable energy, IEX will play an important role as an exchange for this energy in future.

IEX provides accessibility and transparency of power market in India and enhances the speed and efficiency of trade execution. IEX also provides flexibility to the participants for buying and selling on the same day in different time blocks and thereby enables them to manage their requirements more efficiently.

Early mover advantage and strong brand recognition among various participants in the energy trading industry has helped the company to grab significant market share of short term power trading market in India.

Government policies and regulations encourage power trading which brings in more transparency and a mechanism for efficient price discovery. IEX is well placed to benefit from the regulatory policies which will bring in higher volumes.

24x7 Power for All and Make in India initiatives and implementation of open access policies will positively impact the demand of electricity and the market for electricity contract trading in India.

The company intends to leverage itself further in cross-border trade of electricity contracts with neighbouring countries such as Bhutan, Bangladesh and Nepal.

The company intends to launch new products including longer duration contracts and developing markets including futures and options in electricity contracts and other electricity products.

Weaknesses

Nearly 90% of total revenue of the company depends on the volume of power traded on the exchange. Trading volumes may get impacted by inadequate availability or congestion on interstate power transmission network due to lack of available transmission capacity.

Within overall trading volume, adequate supply of power in the short-term market is very important. The short-term market is the most fluctuating market in power trading and gets most impacted in an event of uncertainty be it regulatory, economic or otherwise.

In an event of power surplus scenario, trading of short term is discouraged and also pricing becomes very competitive which can put pressure on the margins.

Domestic slowdown and slow industrial production would result in lower demand of power and thus lower volumes.

Expansion into new markets would result in lower margins in initial phase which may affect the overall profitability.

Any regulations making amendments to the exchanges bye-laws, rules and business rules, leading to any reduction of transaction fees charged by the exchange, any payment of interest to the members on security deposits provided by them, and any increase in compliance and operating costs could adversely affect companys profits.

Valuation

For FY 2017, net sales were up 17% to Rs 203.91 crore. The OPM stood at 70.3% as compared to 71.5% of FY 16, which restricted the OP growth to 14% to Rs 143.29 crore. Other income stood at Rs 33.51 crore up by 33%. Interest cost was down by 51% to Rs 0.13 crore while depreciation was up by 2% to Rs 3.46 crore. Thus PBT stood at Rs 173.21 crore up by 18% YoY. After providing total tax of Rs 59.64 crore, up by 29%, PAT stood at Rs 113.57 crore up by 13%.

For the June 2017 quarter, net sales stood at Rs 55.47 crore with OPM of 76% resulting in an OP of Rs 42.16 crore. Other income stood at Rs 6.19 crore. Interest cost was Nil and depreciation stood at Rs 1.48 crore. After providing for total tax of Rs 16.22 crore, PAT for the June 2017 quarter stood at Rs 30.64 crore. Due to seasonality of business, the June 2017 quarter results cannot be annualised.

The diluted equity share capital of the company stands at Rs 30.33 crore of face value of Rs 10. EPS for FY 2017 works out at Rs 37.4. At higher price band of Rs 1650, The P/E on FY 17 diluted EPS works out to 44. There are no listed peers.

Indian Energy Exchange : Issue highlights
Offer for sale (in Rs crore)
- On lower price band	997.69
- On upper price band	1000.73
Total Issue size for offer for sale ( in no of shares in lakh)	60.65
Price band (Rs)	1645-1650
Minimum Bid Lot ( in number of shares)	9
Post issue share capital (Rs crore)	30.33
Post-issue Promoter & Group shareholding (%)	0%
Issue open date	09-10-2017
Issue closed date	11-10-2017
Listing	BSE, NSE
Rating	46/100

Indian Energy Exchange: Financials
	1303(12)	1403(12)	1503(12)	1603(12)	1703(12)	1706(03)
Revenue from operations	121.21	152.57	144.78	175.03	203.91	55.47
OPM (%)	72.9%	74.8%	71.9%	71.5%	70.3%	76.0%
OP	88.37	114.12	104.09	125.18	143.29	42.16
Other in.	17.16	21.42	31.60	25.11	33.51	6.19
PBDIT	105.53	135.54	135.69	150.29	176.80	48.34
Interest	0.02	0.02	0.24	0.27	0.13	0.00
PBDT	105.51	135.52	135.46	150.02	176.67	48.34
Dep.	5.70	2.65	2.95	3.39	3.46	1.48
PBT	99.81	132.87	132.51	146.63	173.21	46.86
EO	6.94	0.00	0.00	0.00	0.00	0.00
PBT after EO	92.87	132.87	132.51	146.63	173.21	46.86
Tax (including Deferred Tax)	26.57	40.92	42.49	46.29	59.64	16.22
PAT	66.30	91.95	90.02	100.34	113.57	30.64
EPS*	20.2	30.3	29.7	33.1	37.4	#
*EPS is on post issue equity capital of Rs 30.33 crore of face value of Rs 10 each # EPS not annualised due to seasonality of business EO: Extraordinary items, EPS is calculated after excluding EO and relevant tax Figures in crore Source: Capitaline Database

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