8/27/2018 IEX – DRHP NOTES | Value Seeker

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IEX – DRHP NOTES

Posted on August 22, 2018August 22, 2018 by dhruvapandey

IEX NOTES.

How IEX came into existence –

They generate most of the revenue from

1. Transaction fees – Fee earned from participants who trade over the exchange.
2. Annual Subscription Fee.

Combined accounted for average 85% of the revenue.

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What is the biggest problem hindering their growth ? (even though they are growing pre y good
from low base)

Lack of infrastructure –

The transmission capacity basically limits the amount of trading that can be done on Exchange.

What sits between power generation and power consumption are two other critical functions – power
transmission and power distribution.The former is an area largely controlled by the central government
(Pain Point), while the la er is controlled by state governments and private players in select cities.

Should we expect the power infrastructure – transmission / distribution going to improve in future
?

Things are improving –

India Is A Power Surplus Country; The Problem Lies In Transmission And Distribution
(h ps://swarajyamag.com/infrastructure/india-is-a-power-surplus-country-the-problem-lies-in-
transmission-and-distribution)

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Now as an Investor in IEX should we worry about it ?

Short answer – No

Long answer –

First of all they get their cut as soon as trade gets executed over the exchange – There is no worry of
delay in payments from state electricity companies.

Secondly T&D not something that’s going to degrade over time. Electricity is very crucial for
economic growth, for india to grow , for politician to get re- elected it has to improve over time as “it
has been “.

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India’s first power plant was set up in 1897 in Darjeeling. Since then, a conventional capacity of 214 GW was
built up to March 2014. In the next three years since, under the present Narendra Modi government, 60
GW or almost 28 per cent of the 117 years worth of capacity addition has been topped up on the 2014
number.

Third – IEX caters to mainly short term power market volumes, which is just 10% of total power
trading market in India of this 30% is traded in IEX i.,e 3% of total. As the base is significantly low,
IEX can grow its market share in existing power market and hence growth in near term is not really
hindered by the T&D capacity.

PPA – Earlier when Generation / Transmission capacity used to be constrained there was lots of
uncertainty if power going to be available in future or not when you need it , To mitigate this risk
companies used to go for long contracts called PPAs.

Now as the transmission capacity ge ing built up and generation capacity is on surplus , This
liquidity assures power purchaser that on need basis it can be bought through exchange – IEX.

Considering the fact that During the Twelfth Five-Year Plan ending March 2017, about 92 GW of
thermal generation capacity has been added against a target of 72 GW. The liquidity has been
improving.

improvement in Power infrastructure overall leads to liquidity and this fuels more and more
purchase of power on need basis which is via exchange.

What else affect the trading volume in Exchange ?

Economic and market conditions – general supply & demand dynamics.

——————————————————————————————————————————-

They bought the trading software from 63 moons technologies ltd for Rs 130 Cr /- but still the IP
belong to 63 moons as per agreement.

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Okay no problem. What would they do with the IP anyway.

Looks like there is some dispute related to trading software they bought from 63 Moons technologies
ltd.

b.t.w 63 moons is rather interesting company –

Cash – Rs 445.06 Cr > Mcap – Rs 363.96 Cr ( but there a reason , we will see later).

Let’s come back to IEX –

FTIL is financial Technologies (India) Limited (FTIL) (now known as 63 moons technologies
limited).

CLB – Company Law Board

Looks like FTIL – 63 moons was restrained from any sale of its assets – ( probably the reason why its
trading below its cash ) and they sold their software “may be without disclosing” to IEX ?

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They mentioned regulation as risk ( i hope regulators not reading it.)

In short moat is not free of cost , there is regulator called CERC (like SEBI) – Who can spoil the party.

And as highlighted above this approval for renewable energy is going to be a very positive trigger for
the company –

By 2022, the capacity of the renewable energy segment is expected to reach 170GW from 58.3GW at present. Of
this capacity, 100 GW is solar energy, while 60 GW is wind energy. Since wind and solar energy generators are
highly dependent on local conditions, it is expected that power generators would rely on the short-term
power market.

Where company is w.r.t to this today ?

Well they have already started Solar Renewables certificates trading already

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h ps://www.youtube.com/watch?v=gtnukOIUn9E (h ps://www.youtube.com/watch?
v=gtnukOIUn9E)

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Something is terribly messed up with 63 Moons Ltd –

Now, I don’t know What is PSF ? may be an company, which is claiming IEX cannot have the
exclusive rights to the source code. Okay not a big deal they lost the case, but overall seems like 63
moons has lots of similarities with Fortis.

Anyway the maximum damage going to be Rs 130 Cr /- around 1 years of profits they make, Total
Cash on balance sheet is Rs 127 Cr /- & total investment = 379 Cr /- absorbable.

——————————————————————————————————————————–

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Looks like they have invested the float money into tax free bonds and obviously movement of interest
rates may arise in M2M loss but not actual loss. This other income account for just 15% of revenue
whereas for BSE its around 40% .

——————————————————————————————————————————

I doubt this will happen with ease –

—————————————————————————————————————————–

——————————————————————————————————————————

SUMMARY OF INDUSTRY

Generation –
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India is the third-largest electricity producer in the world.

Electricity is among India’s core sectors, with an installed capacity of 327 GW as of March 31,
2017.
Thermal power plants constitute around 67% of the installed capacity, followed by renewable,
hydro and nuclear at around 18%, 14% and 2%, respectively.
During the Twelfth Five-Year Plan ending March 2017, about 92 GW of thermal generation
capacity has been added against a target of 72 GW.
While capacity addition has peaked, the peak demand has grown at a moderate CAGR of 4.1%
during the past five years ending March 2017
In this context, the country has witnessed a gradual decline in peak deficit from 9.0% in the
financial year 2013 to 1.6% in the financial year 2017. Imp – to note – looks like cycle is reviving.

Transmission –

While generation capacity has been added at a faster pace over the last five years, the growth in
transmission has not been commensurate enough to ensure congestion free transmission within the
country, resulting in situations where a certain demand in a market could not be met even as supply
is available elsewhere.

The transmission system in India can be categorized as inter-state transmission system and intra-state
transmission system. The development of intra-state transmission system is the responsibility of state
transmission utilities, while Power Grid Corporation of India Limited (“PGCIL”) is responsible for
development of inter-state transmission system.

Nearly 59% of the transmission system is under state transmission utilities; about 38% is owned by
the PGCIL and 3% by private operators as of March 31, 2017.

Distribution –

This is where gov comes in in big way creates the whole lot of inefficiency in the market.

Some examples of how they hurt sector’s overall productivity –

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Dhruva Pandey
@Dhruvapandey

Gov has to work towards privatization , lack of it has been the

major disappointment.
Ray of hope is there with Indian Airline, that too doesn't seems like
going through.
12:16 PM - Aug 20, 2018

3 See Dhruva Pandey's other Tweets

Short term electricity markets in India.

IEX Competitors –

Short-term power market covers contracts of less than a year for electricity transacted through

(i) inter-state trading licensees;

(ii) power exchanges – IEX.

(iii) directly between distribution licensees (cashless) and

(iv) the Deviation Se lement Mechanism.

How market share is divided between IEX and Others.

Of the total short term volume transacted in financial year 2017, share of exchanges is 34.3%,
followed by traders at 28.6%.
On the other hand, short term volume transacted directly between distribution companies is
18.0% and DSM is around 19.1% in financial year 2017.

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If you see the PIE it looks roughly evenly distributed but the interesting fact is IEX is slowly eating
away market share from traders called inter state trading licensees.

The share of traders has declined to 28.6% of total short term power traded in the financial year
2017 from 36.5% in the financial year 2013.
During the same period, share of direct bilateral (traded between distribution companies)
increased from 39 14.7% to 18.0%.
that of DSM declined from 25.0% to 19.1%
Volume of power traded through the exchanges increased to 41.1 billion units in the financial
year 2017, having grown at 28.3% CAGR between the financial year 2010 and the financial year
2017.

IEX gained market share basically on the expense of inter state trading licensees still enjoys
considerable market share 28%, second largest in the PIE. So, looks like easy run- way ahead to gain
market share and grow even in stagnant market.

As mentioned below –

The price discovery has been best in Exchange – win win for everyone in the ecosystem.

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——————————————————————————————————————————–

Why Exchange volume have been growing faster than other alternatives ?

Interview of SN Goel – MD/CEO IEX.

h ps://www.youtube.com/watch?v=E-UFqN7j3YU (h ps://www.youtube.com/watch?v=E-
UFqN7j3YU)

Don’t have time to watch it i have summarized below –

IEX’s SN Goel – key points from the interview.

I have seen our prices were always more competitive than other competitors facilitate short
term power trade.
We provide more flexibility through our exchange platform than all these other options of
trading short term power.

Some other key points apart from competitive intensity from the interview –

Apart from Tata Power , rest of the PEs have only exited partially via IPO.
Distribution companies are large buyers in the exchange.
In last 4-5 years volumes have increased 15% CAGR.
Exploring new opportunities in –
Opening up GAS exchange.
Futures contract for power.
Opening up cross border transactions of power with neighbouring countries – Nepal , Bhutan
and Bangladesh.

Things that Government needs to do to realize full potential of the power market –

Only when power market develops volume on exchange will increase.

Open excess – In many of the states high cross – subsidy charges exists needs to be rationalized.
Coal supply needs to be rationalized – Government has priority in terms of Coal supply, first it
goes to generators who have PPAs and only if surplus coal is available it gets supplied via E-
Auction to Merchant generators. Coal should be given to all generators based on Mega-Wa
ratings based on their capacity. ( Btw if this happens extremely good for the exchange, This kind
of explains why still most of the power is traded through PPAs and only 3% of total is traded
through exchange. )
Gate closer in intra-day market is 3 hrs, I.e if you buy power through exchange you will only get
after 3 hrs. Whereas in developed countries it is as low as 5 to 30 mins.
High time for Gov to phase out old plants who takes more coal to generate 1 unit of power.

——————————————————————————————————————————–

Long runway for growth –

The volume of short-term transactions of electricity, as a percentage of total electricity generation, has
been between 9% – In developed word it varies from 30% to 60%.
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Exchange is an winner takes all market – IEX enjoys 93% market share.

Key Drivers for short term market

IEX – Business Overview

Electricity products traded over our electronic trading platform comprise

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1. electricity contracts in blocks of 15 minutes in the day-ahead-market (the “DAM”).

2. 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 (the
“TAM”).
3. renewable energy certificates (“RECs”).

We expect to commence the trading of energy saving certificates (“ESCerts”) on our Exchange upon
availability of infrastructure, in the first half of the financial year 2018.

DAM is what driving volume for them today –

The DAM constitutes the substantial majority of the energy contracts that are traded on our
Exchange.

In the financial year 2016 and for the eleven months ended February 28, 2017, we commanded a
99.6% and 99.5% market share, respectively, of electricity contracts in the DAM, in terms of volume.

According to the CERC, in the financial year 2016 and for the eleven months ended February 28, 2017,
93.7% and 94.9% of the traded contract volumes of electricity contracts in the DAM, TAM and RECs
combined, were conducted over our Exchange.

In the financial year 2017, we generated total revenues of 2,374.23 million and our profit after tax
was 1,135.65 million. Our total revenues and profit after tax have grown at CAGR of 14.45% and
14.40%, respectively, between the financial year 2013 and the financial year 2017.

Strengths –

Efficient price discovery and flexibility on our Exchange –

If you interested to know how trading actually works in IEX in detail, do read the below screenshot –

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Fast growing domestic market with conducive Government policies and regulations

According to CRIS, peak demand for power in India is expected to grow at a CAGR of
approximately 7.3% between the financial year 2017 and the financial year 2022.
Further, according to CRIS, the power generated in India is expected to grow by 29.6% between
the financial year 2017 and by the financial year 2022. (5.22% CAGR)
The proportion of energy traded over power exchanges grew from 23.8% to 30.4% of the short
term market between the financial year 2013 and the financial year 2016 and was 34.2% for the
eleven months ended February 28, 2017, according to the CERC.
In addition, most state electricity regulatory commissions have allowed open access to their state
grids, which has facilitated wider participation in energy trading and has increased the liquidity
of electricity products in the market.

Key Drivers for short term Market –

Demand Growth – Positive Impact.

Seasonality – Positive Impact.

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Supply growth – More liquidity → Positive for exchanges

Phasing of old thermal plants – Good for everyone.

International perspective: Power Exchanges.

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This is how IEX should grow as happened in case of developed countries –

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Best care scenario for IEX – Austria / Germany 2.80% to 50%.

Worst case scenario for IEX – France 2.80% to 23%.

In any case there is huge pathway for growth.

How trading volume grew over the years –

SUMMARY FINANCIAL INFORMATION.

Src – h ps://www.screener.in/company/IEX/ (h ps://www.screener.in/company/IEX/)

The best part about the exchange business is your cost is pre y much fixed and whatever volume
gain you see translate into the bo om line.
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g y
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Current Price: 1,660

Market Cap: 5,033 Cr.

ROE: 36.49 %

Debt: 0.00 Cr.

Price to book value: 12.11

Stock P/E: 35.39

Price to Cash Flow: 24.42

Dividend yield: 1.72 %

NPM last year: 47.87 %

Total Cash – 127Cr

Total investment – 379 Cr

Net Profit since 2013 – Rs 462 Cr.

FCF since 2013 – Rs 511Cr.

CFO since 2013 – Rs 539 Cr.

Business basically needs no extra capital to grow and just throws out cash yoy – Net cash grew 27%
CAGR in last 5 years.

Sales grew 11.42% CAGR.

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One need to investigate why NPM improved to 59% recently. – but looks like range bound b/w 48-
52%.

Looks like an business which doesn’t require more capital to grow, generates lots of cash and earns
very high ROE > 30%.

I believe it should continue to earn very high return on Capital, considering long pathway ahead in
terms of gaining market share from licensee traders and long term secular growth in the short term
power market as well.

I don’t see much value in crunching financial numbers for this company, The financial numbers and
ratios can be found here – h ps://www.screener.in/company/IEX/
(h ps://www.screener.in/company/IEX/)

THANKS

BLOGS ARE NOT A RECOMMENDATION SERVICE – These are my personal views about the
Business Quality, Management Quality, Business Execution & Performance.

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Thanks,

Dhruva Pandey

Email : dhruva.pandey@outlook.com

Twitter : https://twitter.com/Dhruvapandey (https://twitter.com/Dhruvapandey)

Twitter Handle : @Dhruvapandey

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3 thoughts on “IEX – DRHP NOTES”

1. Pingback: My Assessment on IEX. | Value Seeker

ABHISHEK SHETE says:
August 27, 2018 at 3:30 am
Hey Dhruva,

Very interesting post on IEX. It was great to read your analysis. I would be looking out for
answers myself but would like to see your views if you know more information about it.

Some major key points –

1. Technology/Patent issues – Has the company completely bought the software? Have you seen
this technology changing in developed countries?
2. History of management performance for last 10 years? More information would be needed to
justify the quality of the company.
3. Management prudence?
4. Have you used any valuation matrix to justify the current price?
5. A good business is the one that gushes out the good amount of cash. A great business is the one
that can reinvest that cash and get even higher returns on employed capital. Let me know if you
were able to find any similar characteristics.
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Again – Thank you for writing this down. I know such analysis takes the huge amount of effort
and hard work.

REPLY
DHRUVAPANDEY says:
August 27, 2018 at 5:10 am
Hi Abhishek ,

Congratulations to you as well for finishing up reading the blog, I know it also takes lots of
effort to read very unorganized / not very user friendly wri en analysis ( i hope my writing
skills will improve over time.)

First of all very good questions, Would just try to share my views on it.

1. Technology/Patent issues – Has the company completely bought the software? Have you
seen this technology changing in developed countries?

Ans – So, software i believe has to be very standard. may be in terms of technology they might
have to update the servers / storage etc and these are not very big costs. you can see they earn
very high return of assets, Net assets were around just 10Cr before they bought software for
120Cr.

coming to software –

To be honest i didn’t understand the whole dispute but looks like all the dispute has been put
to rest. They own the software and rights to update the source code but they don’t own the I.P.

2. History of management performance for last 10 years? More information would be needed
to justify the quality of the company.

There are no promoters as such , All the public shareholders. So, far listening to all the
interviews of Mr. Goel i am very impressed.. He has spent 40 year of his life in the industry
and he understand whats going on.
They are shareholders friendly – first because board consists of all the private equity guys /
investors.
and this is very evident from the fact that they give out 50% of the profits as dividends.
There is a smart and very strong board in there, Their interest and minority shareholders
interests are same.

3. Management prudence?
The track record speaks for itself.

4. Have you used any valuation matrix to justify the current price?

I think today its trading around 35x earnings, Considering multiple growth drivers i believe its
trading cheap. so, if IEX able to gain market share from 3% to 8-9 % from competitors .. its like
3x growth and if over all marketshare of short term trading increases from 10% to 30% that is
3x growth.

there is a potential for 9x growth in long run, That itself gives huge margin of safety in terms
of valuation today.
moderate 15% growth for 5 years means FY 23 PE = 16 ,A company with such moat and
growth is cheap w.r.t this .

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5. A good business is the one that gushes out the good amount of cash. A great business is the
one that can reinvest that cash and get even higher returns on employed capital. Let me know
if you were able to find any similar characteristics.

Its not amazon or google , they typically return most of the cash they earn in terms of
dividends, dividend payout is 50% .
once the locking period get over after an year ,they going to do buyback as well as that is more
tax efficient.

Thanks,
Dhruva

REPLY

CREATE A FREE WEBSITE OR BLOG AT WORDPRESS.COM.

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