Q4FY23 Review: IEX Ltd: Confident of volume recovery

29 May 2023 , 02:54 PM

IEX’s Q4FY23 PAT growth exceeded estimates, aided by higher treasury income and better cost management. As such, Power volumes were down 2% YoY; resulting in subdued PAT growth (2% YoY). IEX has guided for volume recovery in FY24, given lower fuel prices to improve supplies and price moderation. Also, GNA implementation would plug the cost disadvantage of Exchange trades resulting in shift of 10BU from TAM to DAM. This would benefit IEX.

Beat estimates: 

IEX’s Q4FY23 standalone PAT was up 2.5% YoY and 16.4% QoQ to Rs829mn – ahead of estimates. The beat was driven by: 1) Higher treasury income (+41% YoY) – opportunistic investments in MLDs. 2) Better cost management (-19% QoQ) – lower employee incentives and one-off consultancy expense. Operationally, results were in-line; revenues were down 4% YoY (up 7% QoQ) — mirroring volume trend. In Q4FY23, IEX’s Power volumes fell 2% YoY to 24.2Bus; though including RECs and ESCerts trading, volumes were down 3% YoY but up 8% QoQ.

Subdued FY23; volumes to recover in FY24: 

Constrained domestic coal supplies (e-auction volume down 50% YoY) and sharp hike in fuel prices (high generation cost) impacted FY23 trading volumes – down 6% YoY. Further, transmission cost arbitrage between Exchange collective trades (DAM and RTM) and bilateral trades resulted in volumes shifting to DAC. This impacted IEX’s overall market share, which fell 600bps to 88%. IEX is confident of volume recovery in FY24, driven by moderation in coal and LNG prices. This would ramp up supplies on the platform and lower prices. Further, volume growth would be aided by: 1) Traction in LDC segment – lower prices to drive growth (1BU in M2FY24 vs 1.6BU in M8FY23) – FY24 target of 6BUs. 2) Implementation of GNA rules from 1- Aug-23 will plug transmission cost arbitrage, and shift volumes from TAM to DAM segment – volume potential of 9-10BUs. Thus, these 2 factors alone could add 15BU in FY24, implying 16-17% YoY growth. 

Volume recovery priced-in: 

Analysts of IIFL Capital Services upgrade FY24-25 EPS by 2-3% to account for Q4 beat. IEX’s earnings likely to grow at 16% Cagr over FY23- 25, driven by 17% volume Cagr. They value Power business at 35x 2YF EPS (fair value of Rs155) and Rs10/sh contribution (DCF-based valuation) for 47% stake in Gas Exchange. At CMP, see limited upside, retain ADD.