Market Leader Series: Understanding Indian Energy Exchange's Business
This is the second part of the Market Leader Series, in which I discuss companies that lead their respective sectors. The first part, discussing Polycab, can be accessed here.
In this article, we discuss IEX, a company with stellar financials -- ROCE >25%, 5-year FCF CAGR at 45%, nil debt, and very strong profit margins. IEX also enjoys monopoly in its sector. There are, however, risks. Pls do study them closely.
At the outset, please note that this article is only for informational/educational purposes and in no way meant to be a stock recommendation or financial advice. Please conduct your own analysis or consult a SEBI registered investment advisor before you undertake any investment action.
What is IEX?
Indian Energy Exchange is the first and the largest energy exchange in India. It allows for trading of electricity (for physical delivery), just as NSE or BSE allow for trading in stocks.
To understand the dynamics of IEX, however, it may help to understand some basics of the electricity market.
The electricity trade cycle
As you may know, here’s how the electricity trade cycle operates:
The electricity generation companies (popularly called gencos for generation companies), which include the likes of NTPC Ltd, Tata Power Company, Adani Power, JSW Energy, Adani Green Energy, Torrent Power, and so forth, sell electricity to electricity distribution companies (popularly called discoms), which are more regional in nature.
These distribution companies then distribute electricity to you and me.
Examples of distribution companies include Madhya Gujarat Vij Company Ltd (MGVCL), Assam Power Distribution Company Ltd., Maharashtra State Electricity Distribution Company Ltd., and so forth.
In between gencos and discoms, there’s what we call “transmission” of electricity from power generation companies to distribution companies through a transmission network
Electricity Market in India
In India electricity has traditionally been traded in two markets. One, long term markets which allow for trading of electricity for periods extending to as much as 25 years. Two, short term markets for a period extending to an average of 1 year.
(1) Long term market: