Growth Prospects of IEX

Markets exist to facilitate price discovery of a commodity or a security, informationally efficient markets price units rationally. As of now power trading is known to be a single player dominant market the question is will it sustain, if it does how will it grow. The financials are strong with zero debt and producing a supernormal return on equity and capital employed. In this article we will limit ourselves from diving into the financials of the business as it is well known by now.

Listed here are some of the growth prospects of IEX or even power trading exchanges. Mail us if some more can be added.

Growth stimulus from various sectors

The Indian government, which has promised the target to transform India to produce half of the electricity consumption from renewables and making India renewable reliant is by 2050. The pace of transformation not only ensures renewable energy production, but also the huge amount of power produced low of a cost compared to the conventional sources of energy. As DISCOMs being the weakest link, the Union Budget 2021-22 allocated Rs. 3.0 lakh crore for the power distribution sector to be released over five years based on the financial performance and viability of the distribution utilities.

Power utilisation by India and growth in power. Recent times China has been facing hardships due to geopolitics and trust issues from governments that dictate the private contracts. Since China is pushed to unchartered waters “Made in India” seal can be seen all over the world. The manufacturing sector has been the major consumer of the electricity produced, this growth factor will escalate power production and trading in the coming years.

Electric vehicle (EV) is witnessing the run that was never before pampering the producers to ramp up the production and the charging ports through which these 4 wheelers are being charged is on track to drive the total EV play. Failing to mention Tata motors, Tata power, Ola and other EV players will be unacceptable


Growing customer base

Corporate registration has been growing at a CAGR of 3.66% for the past three years. The platform has 6947 registered participants and 4450 industries. There’s still juice left for IEX to grow by increasing the customer base. IEX is still in its growing corporate stage.


IEX and NSE

Price of power in PX and Private agreements

When NSE came to the exchange business it dominated the exchange business and rendered service that is undeterrable by any other player by reducing the transaction cost being operationally efficient. Same way IEX is dominating the electric trade business.

Steady decrease in power per unit electricity


The average trading price stands at ₹2.8/kWh for the year 2021.After 2010 the cost per unit of electricity from the exchange has been lower than the power purchased through traders.


Threat of new entrants:

Economies of scales remains major advantage of IEX which aids in retaining the monopoly. This kind of establishment is called natural monopoly. As large energy producers and energy consumers are registered with IEX its hard for a new entrant to snatch business, in fact there exist a tiny competitor PXIL which occupies 5% of the market, slowly the registered partners would swift o IEX due to lesser trading activity and inefficient pricing of power. National Power Exchange Ltd (NPEX) promoted by PTC does operate in this segment, but the numbers don’t show up.

Trade volume between IEX and PXIL

The regulator

The power exchanges are regulated by CERC, Central Electricity Regulation commission as SEBI is for stock exchanges, sets the margin price for every unit traded in the exchanges. The graph shows the margin is down trending which makes every unit costs lesser year on year. As volumes increase exchanges tend to profit from power trades.

With this tight margin, getting a bite on the pie is difficult. IEX has been the market leader and will be the prime power trading platform for the participants.

Power Trading Margin

Market coupling

What will happen if market coupling happens in IEX?

It is the same happening in the stock exchanges, making the consumers decide which platform they want to use. BSE and NSE established a mechanism to match prices to offer similar prices for every security that is traded on the exchange. IEX and other players should couple prices to keep providing power trading at similar prices, which might make the moat shallower. Even though market coupling is established for the energy trade, the new entrant must run with an utmost operational efficiency or at least more than IEX to grab market share.
Current customer base is growing as the pricing is more efficient in a market when more traders operate. Even after market coupling is established long term relationship would have been built to retain trading partners.

Even though the monopoly status diminishes, the majority of the businesses stays with the exchange as it’s meaningless to switch between platforms for minimal gains or no benefits as the prices will be same.

Indian Gas Exchange

Trade Gas, No problem. IEX launched IGX in 2019, the first gas trading platform. For the past few months, vehicle that runs on natural gas has seen unprecedented demand due to crude oil supply crunch, that led to price peaks and electric cars that still aren’t in the range of affordability. Although in the long term the demand stays muted the revenues will be consistent. As nothing much is left to do with natural gas home applications, selective automobiles drive the demand, but the government has ensured unwavering commitment to transform India to be gas based. Using natural gas is less harmful to the environment. IEX owns 53% of IGX, ONGC currently has 6% and planning to move up to 15% in the years coming. Adani Total Gas, Torrent Gas and GAIL together hold 5% of IGX. 

A recent news about Maruthi Suzuki’s production, the company believes demand for CNG variant vehicles is still high and decides to delay the EV production.

How can demand for natural gas be increased?

Financials

  • Consistent increase in free cash flow.
  • Technological expenditure and capital needs are lower for the business. ROCE is unusually high at 30%
  • Asset light business.
  • Zero debt and over 30% Return on equity.
  • The profit piece stayed more than 50% since 2014.
  • Cash rich asset account.

The business is attractive with or without monopoly as the financials are set right. IEX continues to operate in a high marginal environment due to its lower cost. Apart from issuing dividends, the problem arises when IEX gets bigger in cash and is left with no options to grow, it has to diversify.

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