Renewable Capacity Expansion And Regulatory Updates Will Increase Liquidity And Trading Opportunities

Key Takeaways

• Government initiatives and regulatory changes are set to boost liquidity and trading volumes on IEX, enhancing revenue growth and stability.
  
• Innovations like Carbon Credit Certificates and virtual agreements are expanding product offerings, promoting revenue diversification and improved earnings.
  
• Declining economic growth and competitive pressures in electricity markets may hinder IEX's revenue and market share, with additional risks from regulatory uncertainties and high gas prices.

Catalysts

Provides automated trading platform for physical delivery of electricity, renewable energy, and certificates.

• The addition of new thermal and renewable capacity, including 40 to 50 gigawatts of renewables annually till 2030, is expected to boost sell-side liquidity and drive volume growth on IEX, positively impacting revenue growth.
  
• The government's extension of directives to imported coal-based power plants to operate at full capacity ensures higher liquidity and stability in power availability, potentially leading to an increase in trading volumes and revenue.
  
• Regulatory updates, such as the inclusion of state government-owned generating stations under the Late Payment Surcharge (LPSC) rules, are expected to increase the liquidity of the exchanges, thereby possibly increasing revenue and net earnings.
  
• Growth in the Real-Time Market (RTM) segment and the expected approval of long-duration contracts, along with new opportunities like battery storage arbitrage, could enhance liquidity and volume growth, contributing to higher revenue and potentially better net margins.
  
• Launching the trading of Carbon Credit Certificates and developing new market models such as virtual power purchase agreements could expand IEX's product offerings, resulting in increased volumes and diversification of revenue streams, thus positively impacting earnings.

Indian Energy Exchange Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Indian Energy Exchange's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 64.7% today to 83.5% in 3 years time.
• Analysts expect earnings to reach ₹6.3 billion (and earnings per share of ₹7.0) by about January 2028, up from ₹4.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹5.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.6x on those 2028 earnings, up from 39.0x today. This future PE is greater than the current PE for the IN Capital Markets industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.66%, as per the Simply Wall St company report.

Indian Energy Exchange Future Earnings Per Share Growth

Risks

• Slowing economic growth in India, as indicated by the RBI revising GDP forecasts downward, could reduce overall electricity demand and impact IEX's revenue growth.
  
• Despite forecasts for electricity volume growth, the competitive and declining prices in the Day Ahead Market might not translate into proportional revenue increases, impacting net margins.
  
• High natural gas prices are noted as a challenge, constraining the growth of the IGX segment and potentially impacting earnings negatively if prices do not fall as projected.
  
• The uncertainty around regulatory approvals for long-duration contracts and market coupling can create operational risks and uncertainty in future earnings projections.
  
• The introduction of a coal exchange and other market developments could increase competition for IEX, potentially impacting revenue and market share in the long term.

Valuation

• The analysts have a consensus price target of ₹203.3 for Indian Energy Exchange based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹285.0, and the most bearish reporting a price target of just ₹130.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹7.5 billion, earnings will come to ₹6.3 billion, and it would be trading on a PE ratio of 42.6x, assuming you use a discount rate of 13.7%.
• Given the current share price of ₹179.07, the analyst's price target of ₹203.3 is 11.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.