Why UBS Remains Bullish on IEX Despite Market Coupling Concerns

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Indian Energy Exchange (IEX) is the largest and most liquid electricity exchange in India, facilitating the trading of power contracts across different time frames. The company has a dominant market share of over 90% in the spot power market and has been growing its volumes at a robust pace over the years.

However, the stock has witnessed a sharp correction of nearly 40% from its 52-week high of ₹250.65, mainly due to the uncertainty over the proposed market coupling mechanism for spot power trading. The market coupling is creating a single price for electricity across different power exchanges by matching the demand and supply through a common algorithm.

The Power Ministry has asked the Central Electricity Regulatory Commission (CERC) to introduce the market coupling mechanism by April 2023, which could potentially erode IEX’s pricing power and market share. The market coupling would allow buyers and sellers on different power exchanges to trade with each other, thereby increasing the competition and reducing the price differential.

However, global investment firm UBS has maintained its ‘buy’ rating for IEX with a price target of ₹200, despite the recent fall in market coupling reports. UBS believes that IEX has several competitive advantages that would help it retain its leadership position and profitability in the long run.

Some of the critical factors that UBS cites in favor of IEX are:

Strong network effect: IEX has a large and diversified base of participants, including generators, distributors, industrial consumers, renewable energy producers, and traders. The company has over 6,900 registered clients across 29 states and five union territories, representing about 60% of India's electricity demand. The high liquidity and participation on IEX create a strong network effect that attracts more buyers and sellers to its platform, thereby enhancing its value proposition.

Diversified product portfolio: IEX offers a wide range of products across different time frames, such as day-ahead market (DAM), real-time market (RTM), green term-ahead market (GTAM), green day-ahead market (G-DAM) and long-duration contracts (LDCs). The company also plans to launch new products such as ancillary services, cross-border trade, and derivatives in the future. These products cater to the varying needs and preferences of the participants and provide them with flexibility and choice.

Innovation and technology: IEX has been investing in innovation and technology to improve its operational efficiency and customer experience. The company has developed a proprietary trading platform that enables fast and secure transactions, real-time price discovery, transparent bidding, and settlement processes. The company also leverages artificial intelligence, machine learning, and blockchain to enhance its data analytics, forecasting, and risk management capabilities.

Regulatory support: IEX operates in a regulated environment where the CERC determines the fees and charges for its services. The company enjoys a favorable regulatory framework that supports the growth of power markets in India. The CERC has been encouraging the development of competitive and efficient electricity markets by introducing various reforms and initiatives, such as open access, renewable purchase obligations, real-time market, green markets, and market coupling.

UBS concludes that IEX is well-positioned to benefit from the structural growth drivers of the Indian power sector, such as rising demand, supply constraints, renewable integration, grid stability, and price volatility. The company has a strong business model that generates high returns on capital, free cash flows and dividends. UBS expects IEX to deliver a compound annual growth rate (CAGR) of 18% in revenue and 20% in earnings per share (EPS) over FY23-FY25.

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