The Indian Energy Exchange (IEX) (₹177.13) is the leading power exchange in India and the only listed one. Other exchanges are Power Exchange of India (PXI) and Hindustan Power Exchange (HPX). Exchanges have been playing a significant role in the Short Term (ST) power market. IEX commands the majority of the business, with 84 per cent share in it.

The stock price of IEX is now trading at a discount of 44 per cent compared to its life-time high of ₹318.7. It remained under pressure due to competition and measures such as market coupling. However, year-to-date in 2024, IEX has appreciated 5.4 per cent and so far in FY25, it has rallied nearly 32 per cent.

While the recent appreciation appears to be a relief rally due to the potential delay in implementation of market coupling, it remains a significant risk to the company as it can impact the company’s position as market leader in the business. Also, the trailing PE, at 45, appears expensive.

That said, there are other regulatory developments that are conducive for the power exchange business, which can aid the company’s growth over the long term. So, considering the above, investors who own the stock can hold on to it. But participants looking for fresh opportunities can stay away from this stock until we get clarity on how and when the Central Electricity Regulatory Commission (CERC) will implement market coupling.

A glance at the business

IEX enables trading of electricity, renewables and certificates through its automated platform. The company collects the bids and asks and matches the orders of buyers and sellers of electricity, facilitating the physical delivery of the same.

The bulk of India’s electricity market i.e., 85 per cent, is through long-term Power Purchase Agreements (PPA). The Short Term (ST) power market, where IEX operates, comprises contracts less than one year and constitutes the remaining 15 per cent. In FY24, 55 per cent of the ST market happened through exchanges in which IEX’s share stood at 84 per cent.

The different segments of the ST power market are mainly DAM (Day-Ahead Market), RTM (Real Time Market) and TAM (Term Ahead Market). IEX also deals with ESCert (Energy Saving Certificates) and REC (Renewable Energy Certificates).

DAM is for next day deliveries of electricity whereas RTM is for power deliveries in one hour. In both these markets, IEX holds about 99 per cent market share. TAM is for electricity deliveries up to 90 days. IEX has petitioned CERC to extend the term of TAM contracts from 90 days to 11 months, which is pending approval. Market share of IEX in TAM is 55 per cent. The company also facilitates trading in ESCert and REC, in which its contribution is 70 per cent.

The company also offers GDAM (Green Day-Ahead Market) and GTAM (Green Term Ahead Market), enabling trades in renewable energy.

The major source of income is the transaction fees, accounting for 78 per cent of total income in FY24, which the company collects in electricity trades that it facilitates.

Changing dynamics

IEX, since 2022, has been plagued by increased competition, particularly post the entry of HPX. Competition has led to a drop in market share of IEX, from about 95 per cent in FY22 to 84 per cent in FY24.

In addition, the CERC brought ‘market coupling’ back into the spotlight recently. Market coupling is the concept of aggregating all the buy and sell bids across the exchanges and discovering a uniform Market Clearing Price (MCP). If this is implemented, a buyer in the IEX can find a seller from other exchanges, which can be PXI or HPX. Thus, IEX can lose its advantage of being the most liquid exchange as the clearing of trades from all three exchanges will be done in common by a separate body.

As a temporary relief for IEX, CERC, in its February order, noted that “merely coupling bids of all power exchanges will not yield substantial improvement in market outcome” in DAM and RTM market. However, CERC will go ahead with pilot runs to find economic benefits of coupling the RTM market with the SCED (Security Constrained Economic Dispatch) market. SCED is a power dispatch technique to meet the load in the most cost-effective way by considering constraints such as transmission capacity, system stability, etc.

 Nevertheless, IEX’s management thinks it can take considerable time for completion of such studies and implementation of market coupling. So, while the risk has not gone away, it may not weigh on the stock in the short term.

That said, there have been regulatory tailwinds for the power exchange business. Implementation of Indian Electricity Grid Code, amendments regarding GNA (General Network Access) and Inter-State Transmission charges regulations are expected to improve the ways in which electricity will be traded. Also, the Ministry of Power has amended rules to make URS (Un-Requisitioned Surplus) power available to the market through power exchanges, which earlier remained as unused surplus power by generating companies.

Performance measurement

IEX, which saw a dip in revenue in FY23 due to lower demand for ST power, a major market for the exchange, saw a recovery in FY24. The top line expanded 12 per cent year-on-year to ₹449 crore in the financial year 2023-24. EBITDA, too, improved 12 per cent to nearly ₹377 crore.

Thus, the company was able to maintain an EBITDA margin of 84 per cent in FY24, the same as in FY23. The net profit in the last fiscal went up 16 per cent to ₹341 crore. Since the company mainly depends on transaction charges for revenues, more buying and selling of electricity through exchange routes is key.

India’s total electricity consumption stood at 1,622 BU (Billion Units) in FY24. Within this, the share of ST market and share of exchanges in total consumption has been improving (refer chart).

The country’s total consumption is forecast to grow at 6 per cent annualised rate to 2,300 BU in 2030, paving the way for a potential increase in electricity traded through exchanges. IEX also operates IGX (Indian Gas Exchange), which is at a nascent stage, and ICX (Indian Carbon Exchange), which is yet to take off.

Overall, the company faces risk in the form of market coupling and the valuation of 45 times appears expensive for a company whose net profit rose 16 per cent. However, there are long-term structural benefits due to regulatory measures that IEX can reap. So, investors can hold on to this stock.

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