Indian Energy Exchange (IEX) is the largest and most liquid power exchange in India that enables efficient price discovery and risk management for participants in the electricity market. The company offers various products such as day-ahead market, real-time market, green market, term-ahead market, and renewable energy certificates. The company was founded in 2008 and has a market share of over 90% in the power exchange segment.
In this blog post, we will analyze the current performance of IEX and its future prospects. We will also provide a share price target for 2025 based on various factors such as revenue growth, profitability, valuation, and industry trends.
Current Performance
IEX has shown robust growth and profitability in the past few years. The company reported a revenue of Rs 325 crore in FY21, up by 23% from Rs 264 crore in FY20. The net profit also increased by 17% to Rs 177 crore in FY21 from Rs 151 crore in FY20. The company has a strong balance sheet with a cash and cash equivalent of Rs 267 crore as of March 31, 2021.
The company also rewarded its shareholders with a dividend payout of Rs 6 per share for FY21, which translates to a dividend yield of 0.8% at the current market price of Rs 750 per share as of May 6, 2023.
The company has also demonstrated its leadership position and innovation capabilities in the power exchange segment. The company launched the real-time market and the green market in FY21, which have received positive response from the participants. The company also increased its trading volume by 37% to 73.9 billion units (BU) in FY21 from 53.9 BU in FY20.
Future Prospects
IEX has a positive outlook for the future as it operates in a high-growth industry with increasing demand for electricity and renewable energy. According to a report by CRISIL Research, the Indian electricity market is expected to grow at a CAGR of 6% from 1,381 BU in FY21 to 1,847 BU by FY25.
Some of the key drivers for this growth are:
- The rising population and urbanization
- The growing industrialization and infrastructure development
- The increasing penetration of electric vehicles and smart appliances
- The government initiatives to promote renewable energy and energy efficiency
IEX is well-positioned to leverage these opportunities as it has a diversified product portfolio that caters to various power requirements of its participants. The company also has a large and growing network of over 6,900 participants across various segments such as generators, distributors, industries, and consumers.
The company also has plans to expand its product offerings and enhance its technology platform. It also aims to increase its market share and penetration in the power exchange segment.
Share Price Target
Based on the above analysis, we can estimate a share price target for IEX for 2025 using the discounted cash flow (DCF) method. The DCF method involves projecting the future cash flows of the company and discounting them to the present value using an appropriate discount rate.
The following assumptions are used for the DCF calculation:
- Revenue growth rate: We assume that IEX will grow its revenue at a CAGR of 15% from FY22 to FY25. This is based on the historical growth rate and the industry growth rate.
- EBITDA margin: We assume that IEX will maintain its EBITDA margin at around 55% throughout the projection period. This is based on the historical margin and the industry average.
- Tax rate: We assume that IEX will pay an effective tax rate of 25% on its earnings.
- Capital expenditure: We assume that IEX will invest around 5% of its revenue in capital expenditure every year.
- Working capital: We assume that IEX will have a working capital requirement of around 10% of its revenue every year.
- Discount rate: We assume that IEX has a weighted average cost of capital (WACC) of 12%. This is based on the risk-free rate of 6%, the market risk premium of 6%, the beta of 1.2, and the debt-to-equity ratio of 0.
- Terminal value: We assume that IEX will grow its cash flows at a perpetual growth rate of 3% after FY25. This is based on the long-term growth rate of the economy.
Using these assumptions, we can calculate the free cash flow (FCF) of IEX for each year from FY22 to FY25 and the terminal value as follows:
| Year | Revenue | EBITDA | Tax | Capex | WC | FCF |
|---|---|---|---|---|---|---|
| FY22 | 374 | 206 | 52 | 19 | 37 | 98 |
| FY23 | 430 | 236 | 59 | 22 | 43 | 112 |
| FY24 | 495 | 272 | 68 | 25 | 50 | 129 |
| FY25 | 569 | 313 | 78 | 28 | 57 | 150 |
| TV | 5,000 |
The present value (PV) of the FCF and the TV can be calculated by discounting them using the WACC of 12% as follows:
| Year | FCF | PV |
|---|---|---|
| FY22 | 98 | 88 |
| FY23 | 112 | 90 |
| FY24 | 129 | 93 |
| FY25 | 150 | 96 |
| TV | 5,000 | 2,027 |
The enterprise value (EV) of IEX can be obtained by adding the PV of the FCF and the TV as follows:
EV = 88 +90 +93 +96 +2,027
EV = Rs 2,394 crore
The equity value of IEX can be obtained by subtracting the net debt (debt minus cash) from the EV as follows:
Equity value = EV – net debt
Equity value = Rs 2,394 crore – Rs (-267) crore
Equity value = Rs 2,661 crore
The share price of IEX can be obtained by dividing the equity value by the number of outstanding shares as follows:
Share price = Equity value / number of shares
Share price = Rs 2,661 crore / Rs (30.1) crore
Share price = Rs 88.4 per share
Conclusion
Based on the DCF analysis, we can conclude that IEX has a share price target of Rs 88.4 per share for 2025. This implies a downside potential of around 88% from the current market price of Rs 750 per share as of May 6, 2023.
However, this is only a theoretical valuation based on certain assumptions and projections. The actual share price may vary depending on various factors such as market conditions, competition, innovation, regulation, and customer preferences.
Therefore, investors should do their own research and analysis before investing in IEX or any other stock. They should also consider their risk appetite and investment horizon before making any decision.
Disclaimer: This blog post is for informational purposes only and does not constitute any investment advice or recommendation. The author is not responsible for any losses or damages arising from the use of this information.