Indian Energy Exchange (IEX): Navigating Market Coupling and Stock Volatility

The Indian Energy Exchange (IEX) has been a cornerstone in India’s power market, offering a platform for trading electricity. Recently, IEX shares have experienced significant volatility, with a notable decline of 17% over two trading sessions. This drop has been primarily attributed to government officials’ statements regarding the eventual implementation of market coupling. Market coupling is a mechanism that aims to integrate multiple power exchanges to ensure more efficient and competitive price discovery. However, the timeline for its implementation remains uncertain, adding to the market’s anxiety. Despite this, Investec, a brokerage firm, has initiated a ‘long fast’ rating on IEX, setting a price target of ₹215. This optimistic outlook is based on the expectation of strong volume growth and stable near-term earnings.

Investec’s analysis suggests that IEX will report a 44% overall volume growth and a 17% core volume growth (excluding Renewable Energy Certificates, or RECs) during the September quarter. This robust performance is expected to drive a 30% year-on-year increase in IEX’s EBITDA for the same period. The brokerage firm also anticipates additional clarity on market coupling timelines during the results announcement. However, they believe that the operational implementation of market coupling will take at least two years, which should keep IEX’s near-term earnings stable. The recent drop in share price has corrected IEX’s valuation to 35 times the estimated price-to-earnings ratio for the financial year 2026, down from 45 times, making it more attractive compared to other exchanges.

On the other hand, the broader market trends have also influenced IEX’s stock performance. On a recent Tuesday, the Nifty 500 index closed marginally higher, but IEX was among the top losers, with an 11.60% decline in its stock price to ₹211.61. This drop was largely due to reports indicating the government’s progress on market coupling for power exchanges. While this decision aims to create a more integrated and efficient market, it has raised concerns about its impact on IEX’s dominant market position. The GPT-4-based Benzinga Neuro content generation system, which leverages extensive data and APIs, highlighted this development, providing real-time updates and trading ideas to readers.

India’s power sector is undergoing a significant transformation, shifting focus from long-term Power Purchase Agreements (PPAs) to increased participation in power markets. This shift is driven by the growing demand for electricity from both households and industries. Efforts to expand renewable energy, build transmission networks, and improve energy efficiency have been made, but there is still room for improvement in power access across the country. Corporates are increasingly turning to power exchanges like IEX when other renewable energy options are unavailable. As a result, power exchanges and green market-related products are becoming more critical in meeting the country’s energy needs.

IEX has been instrumental in promoting the use of power exchanges, boasting over 7,600 participants across 28 states and 8 union territories. These participants include distribution utilities, conventional power generators, renewable energy generators, and obligated entities. Additionally, IEX has over 4,800 commercial and industrial consumers from various sectors. Mayank Gupta, Senior Vice President at IEX, has discussed the company’s performance and the favorable policy and regulatory interventions that have deepened power markets. Amendments to regulations regarding network access, grid code, transmission charges, and late payment surcharges have contributed to this growth.

During the fiscal year 2024, IEX’s traded volumes saw a 14% growth over the previous year, accompanied by significant year-on-year growth in consolidated revenue and profit after tax. Government and regulatory measures, such as selling surplus un-requisitioned power on exchanges, have increased sell liquidity and resulted in competitive price discovery. In the first quarter of fiscal year 2025, IEX saw a 21.1% increase in total trading volume compared to the previous year. Notably, in July 2024, IEX achieved its highest-ever total volume, including certificates, and the green market and RECs witnessed unprecedented growth. Looking ahead, IEX aims to introduce new products to adapt to the changing dynamics of the power sector and contribute to the country’s energy transition goals.

Despite these positive developments, the potential implementation of market coupling poses a significant challenge for IEX. Rupesh D Sankhe, an industry analyst, has noted that assuming a 70% market share for IEX, down from the current 84%, there could be a 20% EPS downgrade in FY27. If IEX’s market share falls to 60%, the EPS downgrade could be around 30%. Currently, IEX holds a 97% market share in two key products – the day-ahead market and real-time market (RTA). However, the new exchange HPX does not yet offer these products. IEX’s market share in the term-ahead market stands at 60%. Once market coupling is implemented, a new product will be launched, potentially reducing IEX’s market share in the day-ahead market and RTA to 60-70%, leading to a decrease in EPS.

The stock performance of IEX has been re-rated due to increased volumes over the past year and a half, partly due to delays in market coupling implementation. However, the uncertainty surrounding market coupling remains, which could lead to further corrections in stock prices. The implementation of market coupling will require time, as necessary software and integration need to be developed. The government’s intention is clear: they want market coupling to be in place, aiming to move towards a European model of one nation, one grid, and one price. This ambitious goal will involve integrating all volumes onto one platform through market-based economic dispatch.

While the technical issues and integration of volumes will take time, possibly up to 12 months, the power ministry is currently more focused on capacity addition and renewable integration. Therefore, market coupling is not a top priority at the moment. Nonetheless, the implementation of market coupling will eventually require examination of technical issues by the new power ministry. It may take some time before we see the full implementation of market coupling, but the direction is set, and the industry is preparing for this significant change.

Today, on 24 September 2024, several companies, including Fusion Micro Finance Ltd, Nava Ltd, SBFC Finance Ltd, and Concord Biotech Ltd, recorded losses in the BSE’s ‘A’ group. Among them, Indian Energy Exchange Ltd experienced a significant tumble of 11.12% to Rs 212.65 at 14:47 IST, making it the biggest loser in the ‘A’ group on the BSE. So far, 41.5 lakh shares have been traded on the counter, significantly higher than the average daily volume of 8.72 lakh shares in the past month. Nava Ltd also faced a crash of 7.59% to Rs 1175.1, making it the third biggest loser in the ‘A’ group, with 21,129 shares traded so far, compared to the average daily volume of 37,580 shares in the past month.

SBFC Finance Ltd experienced a decline of 6.41% to Rs 98.91, making it the fourth biggest loser in the ‘A’ group. So far, 17.94 lakh shares have been traded on the counter, significantly higher than the average daily volume of 4.1 lakh shares in the past month. Concord Biotech Ltd also faced a correction of 6.28% to Rs 2231.1, making it the fifth biggest loser in the ‘A’ group. On the BSE, 6,859 shares have been traded so far, compared to the average daily volume of 17,268 shares in the past month. This downward trend reflects the overall performance of the stock market today, highlighting the volatility and unpredictability of the market and the potential risks involved in investing.

Investors may want to closely monitor these companies and their stocks for any potential changes in the future. The average daily volumes mentioned for the past month serve as a comparison point for the current trading volume, emphasizing the heightened activity and interest in these stocks. This news underscores the importance of conducting thorough research and analysis before making any investment decisions. The performance of these companies and their stocks will continue to be monitored by market analysts, providing valuable insights for investors navigating the complex and dynamic landscape of the stock market.

In conclusion, the Indian Energy Exchange (IEX) is at a critical juncture as it navigates the challenges posed by the potential implementation of market coupling and the resulting stock volatility. While the short-term outlook remains stable, thanks to strong volume growth and favorable regulatory measures, the long-term impact of market coupling on IEX’s market share and earnings cannot be ignored. Investors and stakeholders must stay informed and vigilant, keeping an eye on regulatory developments and market trends. As the power sector continues to evolve, IEX’s ability to adapt and innovate will be crucial in maintaining its leadership position and contributing to India’s energy transition goals.