Currently market share of IEX in total power consumption basket is high single digit.
According to CERC after implementation of MBED (market based economic dispatch) entire volume will be transacted via power exchange and implementation will start from 1st April, 2022. (2/21)
According to CERC after implementation of MBED (market based economic dispatch) entire volume will be transacted via power exchange and implementation will start from 1st April, 2022. (2/21)
This is more than 10x opportunity for power exchange and IEX being the monopoly (as of now) is expected to have a massive volume growth.
(3/21)
(3/21)
Let's talk about risk now. Basically there are two major risks.
1. Market coupling:
As of now Buyers in IEX can buy power only from sellers in IEX.
As IEX is already monopoly, it is not possible for buyer or seller to switch platforms because of network effects.
(4/21)
1. Market coupling:
As of now Buyers in IEX can buy power only from sellers in IEX.
As IEX is already monopoly, it is not possible for buyer or seller to switch platforms because of network effects.
(4/21)
If a buyer goes to new exchange, no seller will be available and vice versa. Think of platforms like NSE or MCX.
However implementation of market coupling will disable this moat to some extent. (5/21)
However implementation of market coupling will disable this moat to some extent. (5/21)
Market coupling enables buyer in any exchange platform to buy power from seller in any exchange platform.
Think of someone is selling a share from Zerodha to a buyer in Angle broking platforms. (6/21)
Think of someone is selling a share from Zerodha to a buyer in Angle broking platforms. (6/21)
Let's understand how much it gonna impact IEX volume.
MBED was announced in Dec, 2018 and implementation gonna start in April, 2022 which is again unlikely.
I feel implementation will be delayed by almost a quarter. It is taking almost 4 years to implement MBED. (7/21)
MBED was announced in Dec, 2018 and implementation gonna start in April, 2022 which is again unlikely.
I feel implementation will be delayed by almost a quarter. It is taking almost 4 years to implement MBED. (7/21)
Market coupling was announced in June, 2020 and implementation will take time.
I feel, IEX will enjoy MBED without coupling for a decent period with massive volume growth. (8/21)
I feel, IEX will enjoy MBED without coupling for a decent period with massive volume growth. (8/21)
As long as CERC regulates the commission charges, there will be no price war between different exchanges.
Power is a perishable commodity. If the seller can't sell it is wasted forever. (9/21)
Power is a perishable commodity. If the seller can't sell it is wasted forever. (9/21)
If the buyer can't buy, his plant operation will be impacted due to actuation of under frequency load shedding.
Hence, Sticking to already established technology will be safer.
Need to see how dynamics change after Coupling gets implemented.
(10/21)
Hence, Sticking to already established technology will be safer.
Need to see how dynamics change after Coupling gets implemented.
(10/21)
2. Regulation Risk:
IEX charges 2 paise from buyer & seller (each) for one unit of power.
This has been constant since its inception and regulated by CERC.
(11/21)
IEX charges 2 paise from buyer & seller (each) for one unit of power.
This has been constant since its inception and regulated by CERC.
(11/21)
After implementation of MBED, profitability of IEX can go through the roof and CERC may think it is necessary to reduce this commission.
It is a major risk.
(12/21)
It is a major risk.
(12/21)
Let's talk about two opportunites.
RTM (Real time market) was launched in June, 2020 and it is already contributing 20% volume.
It just enables power purchase for a block just after 30 minutes of real time.
(13/21)
RTM (Real time market) was launched in June, 2020 and it is already contributing 20% volume.
It just enables power purchase for a block just after 30 minutes of real time.
(13/21)
Similary IEX is now talking about "Gross Bidding".
The opportunity is so big that implementation of MBED may not be required.
(14/21)
The opportunity is so big that implementation of MBED may not be required.
(14/21)
Discoms manages their power plant utilization according to demand forecast.
Gross bidding enables them to sell power when MCP (Market clearing price) is higher than variable cost per unit.
Similarly, it enables to buy power when MCP < variable cost. (15/21)
Gross bidding enables them to sell power when MCP (Market clearing price) is higher than variable cost per unit.
Similarly, it enables to buy power when MCP < variable cost. (15/21)
This will enable DISCOMs to buy power from each other.
Basically it enables most efficient generators to run at full capacity at any point of time.
(16/21)
Basically it enables most efficient generators to run at full capacity at any point of time.
(16/21)
Another optionality is IGX which is in nascent stage. After 10 years it may become of the size where IEX is today.
(17/21)
(17/21)
By FY23, we may see serious progress in Gross bidding.
Even if MBED is stuck, Gross bidding provides massive opportunity.
(18/21)
Even if MBED is stuck, Gross bidding provides massive opportunity.
(18/21)
Behind the envelope conservative calculation.
Power exchange volume goes up 10x.
IEX market share becomes 50%.
So, Volume will be 5x.
Assume reduces commission charges from 2 paise to 1 paise.
IEX revenue will be 2.5x (5x volume growth & revenue per unit 0.5x)
(19/21)
Power exchange volume goes up 10x.
IEX market share becomes 50%.
So, Volume will be 5x.
Assume reduces commission charges from 2 paise to 1 paise.
IEX revenue will be 2.5x (5x volume growth & revenue per unit 0.5x)
(19/21)
So considering operating leverage (very little scope), PAT should go up 3x.
Foward PE multiple 24x (currently trading at 72X P/E)
Question is what can be future P/E?
(20/21)
Foward PE multiple 24x (currently trading at 72X P/E)
Question is what can be future P/E?
(20/21)
It would be growing at 5% and will give entire profit as dividend. I feel 20-25 P/E will be sustainable.
Any opportunity in IGX remains as optionality.
(21/210
Any opportunity in IGX remains as optionality.
(21/210
Sharing two links
1. First IEX thread from April, 2020
2. Article on finmedium from Aug, 2020
&
#aoh=16441316472435&referrer=https%3A%2F%2Fwww.google.com&_tf=From%20%251%24s&share=https%3A%2F%2Ffinmedium.com%2F2020%2F08%2Fiex-power-exchange%2F" target="_blank" rel="noopener" onclick="event.stopPropagation()">finmedium-com.cdn.ampproject.org
1. First IEX thread from April, 2020
2. Article on finmedium from Aug, 2020
&
#aoh=16441316472435&referrer=https%3A%2F%2Fwww.google.com&_tf=From%20%251%24s&share=https%3A%2F%2Ffinmedium.com%2F2020%2F08%2Fiex-power-exchange%2F" target="_blank" rel="noopener" onclick="event.stopPropagation()">finmedium-com.cdn.ampproject.org
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