Indian Energy Exchange Limited IPO - Should you subscribe?

Indian Energy Exchange Limited (IEX) is the third mainline IPO of October 2017. Rs. 1000 Crore IPO is opening on October 9, 2017 and closing on October 11,2017. Offer price ranges between Rs 1645 - Rs.1650 per share. Minimum application lot size is 9 shares. Tentative date of allotment is October 23,2017 and listing is October 25,2017 respectively. The allotment status can be seen on this link http://karisma.karvy.com

 

This IPO is a 100% offer for sale. The company will not receive any money out of this arrangement. Existing investors shall sell 60,65,009 shares and 35% is reserved for Retail Investors.

The company has set price range between Rs. 1645 - Rs. 1650 per share. The company's EPS (Dilluted) as on March 31,2017 was Rs. 37.66 per share. If we take lower and higher price band, selling shareholders have offered shares at PE  Multiple of 43.68 - 48.81. The NAV (Net Assets Value) as on March 31,2017 was Rs. 94.92. The selling shareholders have asked the price 17.33 - 17.38 times of it NAV. From these two angles,  the share seems very expensive. Since there are no other listed peers, exact comparison in terms of PE and PB can not be done. So, the share is overpriced or under priced remains subjective. 

 

Though share is little expensive and it is 100% offer for sale, investors in every category shall be interested to subscribe. The primary reason is that this is altogether a different sector. The business of IEX is totally different and top of that it is market leader in its industry, in  fact in a monopolistic position. It facilitates an automated online platform for physical day-ahead contract. Currently, only two energy exchanges operating in India viz. Indian Energy Exchange (IEX) and Power Exchange of India Limited (PXIL) and IEX has more than 90% market share as of March 31,2017.

According to the Central Electricity Regulatory Commission (the "CERC"), Indian Energy Exchange Limited is the largest exchange for the trading of a range of electricity products in India, in terms of traded contract volumes in the financial year 2017. Electricity products traded over our electronic trading platform comprise (i) electricity contracts in block of 15 minutes in the day-ahead-market (the "DAM"), (ii) electricity contracts for fixed terms in the future, such as intra - day contracts, day ahead contingency contracts and contracts upto 11 days ahead, known as the term-ahead-market (the "TAM") and (iii) renewable energy certificates (the "REC")

 

The business more of facilitator for the seller and buyer of electricity. Trading in DAM and TAM product categories through IEX provides participants with a means to meet their power requirements and manage, among other things, availability and price of electricity. IEX primarily brings together sellers of power such as independent power producers, captive power plants, distribution companies and government owned power generation companies. And buyer of power such as distribution companies and industrial, commercial and institutional consumers, and provides them with a transparent, neutral and automated platform for trading of electricity. 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 the exchange. Trades with respect to electricity contracts traded in the DAM and TAM are physically settled, meaning that settlement is made through physical delivery of electricity itself. IEX doesn't own or trade electricity products for its own account. 

 

Incorporated in March 2007, IEX has no specific promoters as on date. It was promoted by FTIL and PFS who later did disinvestments. As on date, promoters or promoter groups hold no shares in the company.

 

Should you subscribe? YES

 

As of August 31,2017, IEX had over 5900 registered participants of which over 3200 were active. Over 4300 registered participants were eligible to trade electricity contracts and over 4000 registered participants were eligible to trade RECs. Its participants registered to trade electricity contracts are located across 29 states and five union territories in India and include 50 distribution companies, over 400 electricity generators and over 3900 open access consumers. In the Fiscal 2017, participants traded and cleared 405.28 Crore kWh of power on IEX which represents 77.5% from 228.27 Crore kWh of power traded on IEX in Fiscal 2013. For the Fiscal 2018, as on August 31,2017, participants traded and cleared 197.15 Crore kWh of power on IEX already (Annualised 473.16 Crore)

 

As of August 31,2017, in addition to participants registered to trade electricity contracts, participants registered to trade RECs on IEX included over 1000 renewable energy generators and over 2900 industry and corporate consumers. In the Fiscal 2017, participants traded and cleared 0.462 Crore RECs on IEX which represents growth of 132% from 0.199 Crore RECs traded and cleared on IEX in the Fiscal 2013. For the Fiscal 2018, as on August 31,2017, participants traded and cleared 0.091 Crore REC on IEX already (Annualised 0.22 Crore)

 

This company is very liberal in paying dividends. As per company's dividend policy, the board endeavours to maintain a dividend pay out (interim  and final put together) of approximately 50% of PAT every financial year.

IEX's is a consistent performance which is  evident from its revenue from operations and PAT. The company's revenue from operations and profit after tax have grown at CAGR of 14.45% and 14.40% respectively, between Fiscal 2013 and Fiscal 2017. This is the company which has 47.83% profit margin. It is more of technology based service industry yet profit margin is very impressive. Return on net worth is 41.30%.

IEX has many other competitive strengths like efficient price discovery and flexibility on exchange, first and largest energy exchange in India with strong brand recognition, fast growing domestic market with conducive Government Policies and regulations, diverse participant base ensuring liquidity on exchange, highly scalable and proven technology infrastructure, professionally managed company with a highly qualified and experienced management team.

Conclusion:

From Revenue from operations to PAT and profit margin to RoNW(Return on Net Worth), IEX is outshining. Not to forget liberal dividend policy. So, the price it has asked is justifiable. The number of shares are very less and demand will be high. If shares are allotted, then a big bash. Cheers..!!

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Bye for now...happy investing...

Thank you for reading...Jai Hind

CA Prashant Seta

(Disclaimer : I've opined based on my knowledge and understanding. Investors should do their own research before applying)