Q3FY24 Review: IEX Ltd: Volume recovery drives PAT; regulatory risk prevails

29 Jan 2024 , 02:33 PM

IEX’s Q3FY24 PAT grew 25% YoY; largely in-line, driven by 17% YoY increase in volumes. Improved supplies on IEX and shift from TAM to DAM segment drove volumes. IEX remains sanguine about volume growth and expects incremental supplies from the imported fuel-based power plants. On market coupling, mgmt said that CERC is still evaluating the comments and hence, difficult to share timelines. Analysts of IIFL Capital Services believe that improved volume growth can drive near-term stock performance. However, concerns on market coupling weakens the case from a medium-to-long-term horizon. Analysts of IIFL Capital Services maintain ADD and value the stock at 25x FY26 EPS. 

Strong performance; in-line results: 

IEX’s profits grew 25% YoY and 8% QoQ to Rs893mn – largely in line with estimates. Profit growth was driven by strong volume growth (+17% YoY) – highest in the last seven quarters. Power volumes grew 14% YoY and REC volumes were up 69% YoY. Increasing power demand and change in transmission rules post the GNA implementation (effective Oct’23), drove volume growth. The company shared that DAC volumes are down 0.4BUs, which was 5BUs in H1FY24. While DAM volumes are up 25% vs H1FY24 average. Therefore, IEX share in Q3FY24 has increased to ~90% vs 82% a quarter ago. Fungibility in RPO obligations across sources drove REC volumes. 

Increasing supplies to drive growth; no clarity on market coupling: 

Management expects increasing supplies on the DAM platform to aid volume growth. Sharp decline in international coal prices (down 35- 40% YoY) and R-LNG prices (down 50% YoY) — have reduced variable cost of plant running on imported fuel. Mgmt estimates that 10,000 to 12,000 MW of projects would be able to supply this time at a variable cost of Rs5-7/unit. On market coupling (MC), CERC is evaluating the comments received (127 submissions). As of now, there is no clarity on the timelines. Management maintains that MC will not lead to any incremental benefits in the current Power market structure and thus, there is no strong case for the same. 

Uncertainty on MC weighs on valuation: 

In near term, analysts of IIFL Capital Services expect IEX volumes to grow by 15-20% YoY – this could drive stock price. However, uncertainty on MC risk long term growth. Thus, we remain cautious on the stock from medium-to-long term perspective. In base case, we expect IEX volumes to grow at 15% p.a., driven by supply push from the government (faster execution of ongoing projects) and favourable regulations (URS supply). However, given concerns on MC, analysts of IIFL Capital Services value IEX at 25x FY26 EPS.