IPO Snapshot:

Indian Energy Exchange is entering the primary market on Monday 9^th October 2017 with an offer for sale (OFS) of upto 60.65 lakh equity shares of Rs. 10 each by a clutch of investors such as Renuka Ramnath’s Multiples PE (45% of OFS), Tata Power (21%), Golden Oak Mauritius (11%), Aditya Birla PE (8%) among others, in the price band of Rs.1,645 to Rs. 1,650 per share. Representing 20% of the post issue paid-up share capital at the upper end, this Rs. 1,001 crore issue will close on Wednesday 11^th October and listing is expected on 23^rd October.

Company Overview:

Indian Energy Exchange (IEX), established in 2008, is India’s premier and largest ‘power exchange’ where trading of electricity products (for physical delivery) such as day ahead market, term ahead market, renewable energy certificates and energy saving certificates (commenced from 26.9.17), takes place. Company enjoys virtual monopoly, with 94.8% volume market share in day ahead market, term ahead market and renewable energy certificates combined, with sole competitor Power Exchange of India clocking the balance. The exchange has technology in place to easily scale business to 2.5x of current volumes, while liquidity is healthy with diverse participant base comprising 400+ electricity generators, 50 distribution companies, 3,900+ open access consumers.  

Financials:

Company’s financials can be summed up well in two words - healthy and consistent. It clocked 14% CAGR for 4 years between FY13-17, on both topline and bottomline level, as traded volumes of electricity contracts grew at 15% CAGR and renewable energy certificates at 23% CAGR during this 4 year period. FY17 revenue of Rs. 204 crore was up 17% YoY, with transaction fees accounting for 87% and balance split equally between annual subscription fees and processing and transfer fees. FY17 EBITDA rose 18% YoY to Rs. 177 crore while net profit was higher by 13% YoY to Rs. 114 crore, leading to FY17 diluted EPS of Rs. 37.66. Strong financial performance continued in Q1FY18 too, with revenue of Rs. 55 crore, EBITDA of Rs. 48 crore and net profit of Rs. 31 crore. Diluted EPS of Rs. 10.16 has been reported for the first quarter of FY18.

As of 30-6-17, company’s net worth stood at Rs. 306 crore, with BVPS of Rs. 104. Most of the investment is parked in bank FD, leading to high other income of over Rs. 33 core in FY17, on closing cash and equivalents of Rs. 301 crore or Rs. 99 per share. Thus, RoNW has been very healthy at Rs. 41.30%, with 3 year average return being 38.6%. 

Shareholding:

While the company was originally promoted in 2007 by Financial Technologies and PTC India Financial Services, currently the two no longer hold a single share in the company. Hence, IEX does not have any identifiable promoter and is owned by 63 investors and power companies - DCB Power Ventures holds 15% stake, 2 funds of Multiples PE hold combined 12.8% while 10% is held by TVS Shriram Fund. Other investors include Westbridge, Lightspeed Ventures, Agri Power and Engineering Solutions and AF Holdings.

Many funds such as DCB Power Ventures, TVS Shriram, Aditya Birla PE, Motilal Oswal Financial, Agri Power have entered the company in the past 2 years, via secondary buys, at approximate company valuation of Rs. 2,150 crore. While Tata Power is making a complete exit via the OFS, holding of Multiples will decline from 12.76% to 3.76% S, Aditya Birla PE’s stake will reduce from 5% to 3.32%, while Golden Oak’s will contract from 4.50% to 2.25%. 

Valuation:

 At Rs. 1,650, company’s market cap will be Rs. 5,004 crore and EV Rs. 4,703 crore. This implies PE multiples of 44x and 39x, based on FY17 and FY18E respectively. The EV/EBITDA multiples are 27x and 24x respectively.

Below is a list of past transactions (all secondary), which value IEX between Rs. 2,150-2,500 crore.

Based on above transactions, current offering seems on the higher side, as company valuation has zoomed more than 2x in 2 years. However, based on comparison with other listed exchanges (although not an apple-to-apple comparison), the pricing appears attractive, given IEX’s market dominance and healthy profitability.

IEX’s valuation multiples are higher than BSE, given its dominant market share and near monopoly position versus severe competition being faced by the latter, raising questions over its growth. In relation to MCX, IEX’s PAT margins are higher justifying the premium valuation (EV/EBITDA of 27x vs 22x for MCX and PE of 44x vs 42x for MCX) over the commodity bourse. Thus pricing of IEX IPO is reasonable. 

Conclusion:

Solid fundamentals with consistent growth in financial performance coupled with dominant market share make the issue an attractive investment opportunity. Issue is a ‘subscribe’, both from the listing gains and long term perspective.

Disclosure: No interest.