India Energy Exchange - IPO Analysis
IPO rating - 46 (Invest with limited exposure)
About the Issue
Indian Energy Exchange plans to issue 60.65 lakh shares in the price band of Rs 1645–1650. With this, it plans to raise ~Rs.1000cr. The minimum lot size is 9, which implies that investors would need minimum investment of Rs.14,805-Rs.14850. The issue opens on October 9, 2017 and closes on Oct 11, 2017. The company will be listed on both NSE and BSE. The lead managers for the issue are Axis Capital, IIFL Holdings and Kotak Mahindra Capital Co. Ltd.
Objects of the offer
The company expects to benefit from listing. Also, none of the proceeds will be received by the company as it is an offer of sale by the shareholders. However, the issue expenses will be shared proportionately by the company and selling shareholders.
About the company
Indian Energy Exchange provides electronic trading platform for trading of electricity products in India. The electricity products include electricity contracts in blocks of 15 minutes in the day-ahead-market (DAM). In this segment, the company is a market leader and has maximum number of trades in this segment on its exchange.
The other products include 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). Also it has presence in renewable energy certificates (RECs) trading and has recently launched energy saving certificates (ESCerts).
The company operates in the short term electricity market under which contracts are for a period of less than a year. In the Indian power market, short term electricity market comprises 10.3% of the total electricity generated. As per CRIS, the short term electricity market is expected to grow to 21.1% of the electricity generated by 2022, out of which 43% is expected to be traded on the exchange.
Exchange brings together the buyers of electricity like distribution companies and other power consumers with sellers such as power producers, captive power plants, distribution companies and government-owned power generation companies. As of Aug 31, 2017, the company had 3,200 active participants on its exchange and in FY17 40,528 million kWh of power was traded and cleared on the exchange.
Financial performance
In FY17, the company's revenue was Rs.237.42cr and PAT was Rs113.56cr. For Q1FY18, the revenue was Rs.61.66cr and PAT was Rs.30.63cr. The revenue and PAT for the company has grown at CAGR of 14.45% and 14.40%, respectively, over FY13-17.
In the FY17, participants traded and cleared 40,528 million kWh of power on the exchange. The volumes in FY17 2017 have grown by 77.5% from 22,827 million kWh of power traded in FY13.
The company has shown a robust growth in PAT which is seen in the improvement in RoNW from 37.52 in FY15 to 41.3 in FY17.
Industry overview
According to CERC, the electricity generated in Indian power market consists of 89.7% of long term and medium terms electricity contracts which are for more than a year, while 10.3% consists of short term electricity market. Out of the total electricity generated, the short term sale of electricity accounted for 3.6% of the total electricity generated in FY17.
Peak power demand is expected to grow at a CAGR of 7% over FY17-22. This coupled with expected growth in power generation at a CAGR of 29.6% over FY17-22 is expected to be a key driver for power trading on exchanges.
We can see that exchanges are gaining more popularity as the proportion of energy traded over power exchanges grew from 23.8% to 34.5% of the short term market over FY13-17. Due to the power glut, we see that the weighted average price discovered on exchanges dipped to Rs2.5 per KWh as against the average Rs.3.53 per kWh charged by the traders in FY17.
We see that power sector is undergoing a transformation phase and moving from power deficit to power surplus phase. However, the transmission needs an overhaul to be able to utilise the power generated. The demand-supply gap creates the need for the short term supply agreement and trades. We see that increase in renewable footprint and flexibility to feed power will lead to higher short term trades and better price discovery.
Valuation and outlook
We see that on the higher price band, the company is valued at P/B of 16.3x and P/E of 43.8x on FY17 basis. The valuation seems high considering the time it might take for short term trading of electricity to see a quantum leap. The company does not have any peers for comparison.
We see that power sector is undergoing reforms and short term trading of electricity is gaining traction. We see the company has been consistently growing revenues and PAT. We see the company as a play on power transmission reforms and will benefit the most from it.
We see the company for long term benefit and would advise investors to Subscribe with limited exposure.
*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment