Indian Energy Exchange Limited (IEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Indian Energy Exchange Q2 FY '25 Rresults Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumit Kishore from Axis Capital Limited. Thank you, and over to you, sir.

Thank you, Neha. Good afternoon, ladies and gentlemen. On behalf of Axis Capital, I'm pleased to welcome you all for the IEX Q2 FY '25 Earnings Conference Call. We have with us the management team of IEX, which is represented by Mr. S.N. Goel, the Chairman and Managing Director; Mr. Rohit Bajaj, Joint Managing Director; Mr. Vineet Harlalka, Chief Financial Officer; and Ms. Aparna Garg, Head Investor Relations and Corporate Communications. We will begin with the opening remarks from Mr. Rohit Bajaj, followed by an interactive Q&A session. Over to you, sir.

Good afternoon, everyone. I welcome you all to the IEX Earnings Call for Q2 FY '25. With me today on this call are Mr. Satyanarayan Goel, CMD IEX; Mr. Vineet Harlalka, our CFO and Company Secretary; Mr. Amit Kumar, Head of Market Operations, New Product Initiatives & Exchange Technologies; Ms. Aparna Garg, Head of Investor Relations and Communications; and Mr. Aditya. Friends, multi-government 3.0 recently concluded 100 days, maintaining its thrust on infrastructure development, innovation push and economic growth. The Indian economy continues to be the world's fastest major economy with yet another reported quarter of robust GDP growth. The economy grew 6.7% Y-o-Y in Q1 FY '25, allowing the RBI to retain its GDP forecast for FY '25 at 7.2%. In the wake of Q1 GDP growth, the World Bank has also revised its GDP growth projections upwards for FY '25 to 7% from 6.6% projected earlier. On the power sector front, electricity demand growth during the second quarter slowed on the back of better-than-expected monsoon. Monsoon was 8% higher than long-term annual average. Power demand at 435 billion units in Q2 was largely flat at plus 0.5% Y-o-Y with a peak demand of 227 gigawatts. However, in the first 6 months of FY '25, power demand was higher by 5.6% over the previous year. To meet India's growing energy demand, the Ministry of Power has maintained its focus on capacity addition and strengthening of obviously all power infrastructure. Almost 28 gigawatt of thermal capacity is under construction, out of which 15 gigawatt is expected to get commissioned in this fiscal and the balance 13 gigawatt in the next 2 years. Further, 58 gigawatt of capacity is in various stages of planning, statutory clearances and bidding and this should come in the system over next 6 to 7 years. Capacity addition is being regularly monitored by the Ministry of Power. In addition, 40 to 50 gigawatt of renewable capacity is to be added every year until 2030. The government also plans to add 39 gigawatt of pump storage project PSP by 2030, out of a total potential of 184 gigawatt. Recently in September, MNRE issued guidelines for viability gap funding scheme for offshore wind energy projects worth 1 gigawatt across the states, Gujarat and Tamil Nadu. It is proposed in the scheme that any [indiscernible] powered from these projects can also be sold on the exchanges. This is expected to increase sell-side liquidity on the exchanges. At the recently concluded Global Energy Investors meet in Gujarat, our Honorable Prime Minister also underscored India's strategic growth to expand its renewable capacity to 500 gigawatt by 2030. Energy developers at the meet pledged substantial commitment to capacity creation under their Shapath Patra Agreement. At the event, the government also highlighted plans to develop 17 cities as a model solar cities. On the fuel side, this fiscal has not seen any shortage so far. Coal is available through the e-auction route at a very nominal premium of 10% to 20% with respect to the administered price and coal inventory today stands at about 14 days. Imported coal prices in Q2 have also been competitive at $52 per tonne. Similarly, gas prices at $12 per MMBtu have remained largely stable in the first half of FY '25. With favorable monsoon this year, high hydro and wind generation and ample availability of fuel has led to higher liquidity on the exchange platform with some liquidity increasing by 41% over H1 FY '24. With these strengths in liquidity, volume growth is expected to continue going forward. Let us now talk about important regulatory updates and policy initiatives that helped deepen our markets. Recently in the draft, the CRC has proposed various changes in thermal head market design, which will align [indiscernible] products across exchanges and also help in improving liquidity. The Deviation Settlement Mechanism Regulation 2024 has made deviation management more stringent. This is likely to promote further discipline leading to better grid stability. Under the proposed amendments, deviation charges are again linked to great frequency with regards to solar and wind generators. Deviation percentage allowed for levy has been narrowed to 10%. This is expected to further increase RTM volumes at exchanges. With regards to cross border electricity market, the CA has allowed generating stations sending cross border power through a dedicated transmission line to facilitate sale of power within India in case of sustained non-scheduling of capacity or default notice issued by a generator for debt delayed payment under their respective PPA. This has the potential to increase liquidity on the exchanges. To meet high power demands, the MoP recently extended Section 11 directive to imported coal-based plants to operate up to 31st December 2024. These assets will be utilized to meet demand and support liquidity on the exchanges. To address challenges posed by seasonal variations in electricity demand, which led to sharp surge in power consumption during crunch periods, the CRC recently issued an order to ensure adequacy of resources, identify generation, demand response capacity and generation flexibility requirements. Under the amendment to late payment surcharge rules, the government has directed all generating stations, which have long-term PPAs to offer unrepositioned power on the exchange platform. As a result, about 100 million units of URS power from central generating stations is coming to the exchange platform, out of which 15 million to 20 million unit is getting cleared on daily business. Soon generating stations which are within the states, will start to offer URS power on the exchange, which will further increase liquidity of the exchanges. Under provisions of Energy Conservation Act 2001, the Gujarat Electricity Regulatory Commission has introduced stringent compliance norms for obligated entities. In the event, an obligated entity does not fulfill its renewals purchase obligation and also does not purchase the certificates, the commission has introduced payment of traditional penalty up to INR 3.72 per unit for a shortfall in the specified renewable energy consumption targets. This should provoke compliances and help maintain a vibrant REC market. These changes are expected to be positive for exchanges and are bound to improve sell-side liquidity and softer power prices. As prices continue to remain competitive, it is expected to present an opportunity for DISCOMS and commercial and industrial consumers to optimize their power procurement costs. IEX business performance during Q2 FY '25 has been strong. We recorded a total trading volume of 36.7 billion units in this quarter with a growth of 38.2% on year-on-year basis. For the first half of FY '25, IEX traded volume of 67 billion units, a growth of 30% over the same period in FY '24. Consequent to reduction in REC prices, we revised our transaction fee or added fees from INR 20 per certificate to INR 10 per certificate on either side of transaction with effect from 12th August, 2024. In Q1, a total of 63 lakhs certificates were traded, a jump up to 77% over the same quarter last fiscal. RTM segment has seen strong growth this fiscal. For Q2 FY '25, RTM volumes were higher by 31% Y-o-Y at nearly 11 billion units, showcasing its critical role in developing discounts and open access consumer efficiently manage short-term electricity needs. In September 2024, RTM recorded the highest single day trade volume of 173 million unit. RTM also achieved its highest ever monthly volume of nearly 3.5 billion units. A share of RTM in our overall product mix has also increased to nearly 30% over the last 2 quarters from 27% at the end FY '24. RTM's ability to offer flexibility and immediate responsiveness highlights the opportunity to efficiently integrate renewables with the grid. Similarly, for the quarter, Green market volumes rose to 246% to nearly 2.6 billion units as compared with Q2 FY '25. In terms of new products, we continue to await approval from CRC for our long duration contracts. We have already filed a petition with them for approval of 11-month contract on which the hearing has happened and order is reserved. Further, we have filed patients with CRC for approval of Green RTM segment. Green RTM would provide opportunity for RE sellers to avail price premium over conventional power and also biased to avail Green attribute of electricity. This segment shall also help reduction variation exposure into [indiscernible] providing an avenue to trade Green power just one hour in advance. We are happy to inform that our wholly-owned subsidiary, International Carbon Exchange has been accredited as India's first renewal energy certificate issuers. I-REC is globally recognized digital certificate that serves as a transferable proof of generation of 1 megawatt hour of energy from renewable sources. Further, the Honorable Minister of Coal, Shri G. Kishan Reddy earlier this week announced that India's first coal exchange would be set up soon and that the exchange would work under the supervision of whole controller organization. IEX has been working with stakeholders to explore this diversification opportunity. On another front, in August, the trough guidelines for authorization and functioning of extended power responsibility, EPR trading and settlement platform for plastic packaging has been issued by the Central Pollution Control Board. This will help in the transparent and competitive price discovery for EPR certificates through an online platform. EPR certification ensures proper recycling, reuse, end-of-life disposal of waste generated from electronic and plastic products. It is expected that this would be extended to other types of waste, such as e-waste, battery waste, tire waste, used oil waste, et cetera. We are working with stakeholders to evaluate business diversification opportunity in this segment. Let us now summarize the financial performance of the company in this quarter. On a consolidated basis, revenue for the company grew 26.2% on year-on-year basis in Q2 FY '25, increasing to INR 167.8 crores from INR 133 crores in Q2 FY '24. Consolidated PAT increased by 25.2%, rising to INR 108.2 crores in quarter 2 of FY '25 compared with INR 86.5 crores in quarter 2 of FY '24. IGX traded volume of 118 lakh MMBtu for Q2 FY '25 compared with 195 lakh MMBtu traded in Q2 last fiscal. Profit after tax for IGX for Q2 FY '25 came in at INR 6.1 crores compared with INR 7.8 crores in Q2 FY '24. For the first half of FY '25, IGX recorded a PAT of INR 13.6 crores, higher by 20.7% compared to the same period last fiscal. Gas prices have remained stable over the last 2 quarters, and volumes are expected to pick up as we approach the winter months. Way forward -- hence, the power sector is undergoing rapid visible shift. A year ago, battery storage rates were almost about INR 10 lakh per megawatt per month. But rates in the recent [indiscernible] came down to about INR 2.37 lakh per megawatt per month under the VGF scheme. The competitive rates [indiscernible] make a promising case for market development. Prices on the exchange provide enough arbitrage to make [indiscernible] commercially viable at the current prices. This will improve liquidity during nonsolar hours and will help in meeting peak hours demand. With the CA forecast of peak power demand of 458 gigawatt by 2032, power consumption growth will continue to drive exchange volume growth. On the liquidity side, MOPs initiative on renewables and thermal capacity addition will keep power procurement cost stable. The regulatory environment and government initiative to facilitate the path of energy transition shall continue to support market development. IEX shall also continue with the diversification initiative within the sector to grow them to significant value. As India marches towards achieving this next zero target, there is bound to be a growing roll of power exchanges in the country and in the landscape and IEX shall continue to be part of this journey. Thank you. And now we can have questions and answers.

[Operator Instructions] The first question is from the line of Mohit Kumar from ICICI Securities Limited.

Congratulations on a very good set of numbers. My first question will be, what is your market share will be in this quarter vis-à-vis other exchanges?

Our market share has been almost about 83% now.

Understood, sir. My second question, sir, on the transaction fees. When we take the revenues and revise by number of units, it seems like the transaction fees for the quarter is INR 3.7 per unit. Are we giving a discount?

In case of REC market, the rates have come down. REC rates are now almost about INR 120, INR 110. So we have reduced the transaction fees from the IP. And this is because of that.

Right. My last question for -- the third question is, where is the long-term trading volume, I think we're looking to start the new product, actually more than 3 months. Where it is right now? When do expect to launch that product?

CRC hearings are complete, already resolved. So we are waiting for the CRC order.

Understood, sir. And last question is how the -- Grid started the pilot study for market company? Where is it right now?

We are yet to submit the report.

Have you stated the [indiscernible] or is it still elevated?

We are really not aware of that. What we understand is that they were in the process of developing the software, they were taking the data from us to validate the software. But what has happened in the simulation, we are not aware about that.

[Operator Instructions] The next question is from the line of Sumit Kishore from Axis Capital Limited.

My first question is in relation to -- on volume growth that you have seen in REC in Q2. I mean, during the quarter, from July to August, from August to September, from...

There is some interruption in the voice. I could not hear your question. Will you repeat it?

Now?

No, not.

Okay. I will go back in the queue in that case.

Now it is better. Please continue.

So I was asking that during the September quarter, the REC volumes kept coming off from July, which was a very good month, followed by a lower number in August and further decline in September. What was the dynamics here, although REC in each of these months were much higher than the prior period on a year-on-year basis? And what is the likely road map going forward now that REC prices have come off so substantially?

Volumes were significantly higher in the month of July because Bihar is one state where there was a lot of deficit and they purchased good amount of [indiscernible]. And since they completed their RPO compliance in the month of July by buying significantly high number of [indiscernible], so in August, September, they were not there, [indiscernible] was not there. And I think because of that, the numbers have reduced. But I'm sure that trend with respect to last year, increasing trend, that will definitely continue because REC rates have come down, and there are many interested parties who are going to do their [RTO] compliance and purchase the REC.

Very clear. The second question is that in a quarter where India's power demand growth was barely up 0.5%, IEX electricity volume growth was up 23%. So aside from the factors of better fuel availability, lower cost, better liquidity, were there any other IEX factors or anything structural which would imply that the momentum of growth would continue going forward as possibly power demand actually may pick up at the India level? Your thoughts there, please.

Yes, demand is definitely expected to increase. I mean, India is a growing economy. Our GDP is increasing at a rate of 7%. If GDP is increasing. power demand is also going to increase. And government also has taken many initiatives to increase the electricity comsumption because this is a more convenient method of transporting energy. And I'm sure demand -- the projected side of the demand is -- demand for electricity is going to increase at a rate of almost about 7% for the next 7, 8 years. And if that is the case, then definitely [indiscernible] also will increase because 7% of increase, that is virtually almost about 130 billion units increase. And I'm sure a good part of this incremental demand will come to the market.

Sure. Electricity volume growth? How is the month of October panning out so far in terms of electricity volume growth?

It is a growth, but October demand is slightly lower because of the temperature dip in the northern region and also rains in the Southern area. But there is, I think, almost about 8% kind of volume growth.

The next question is from the line of Bharani from Avendus Spark.

Am I audible?

Yes, yes.

Yes. So my first question is on the transaction fees. Now in April 2023, when the transaction fee was approved by CERC for IEX, the document talked about the regulator asking the commission to come out with a discussion paper outlining global distractions on transaction fee and after that, you can take a call on the transaction fee if needed. So just wanted to get your sense on, one, where is this process? And second, in your opinion, whether the transaction fee for all the electricity products will be changed in the future, especially given now even we ourselves have decreased transaction fee in REC products where prices have come down?

Yes. I mean, April '23 order did not specify any time line for the discussion paper. So as of now -- I mean, to our knowledge, nothing has happened and nothing is happening on that. But as far as transaction fees is concerned, I think this issue has been deliberated multiple times in CERC. In 2018, also CERC order came. And there also, they had allowed 2% as transaction fees. It was again allowed in the 2021 regulation and then again, in 2023 orders. And when [indiscernible] that in case of REC since the rate has reduced, we reduced that on [indiscernible]. But in case of electricity, our transaction fees is continuing as 2% on other site right from 2011 when the electricity rates were almost about INR 2.5, INR 3. Today, electricity clearing price is almost in the range of INR 5. In spite of that, we have not increased the transaction fees. So -- and even if you look, the trading activities, what is happening in the sector, there regulator has allowed transaction fees up to INR 0.7 per unit. Government of India company city, when we are buying power from the renewable generator and selling it to distribution company, they are also allowed a transaction fees of -- a steady margin of INR 0.7. So if that is the case, I don't see any reason why this INR 0.4 transaction fees will not be allowed or will be considered as high.

Yes, I think that is good to know. Second question is on market coupling. Now in February 2024, when the result of the initial pilot study was given by CERC, a document talked about doing further pilot study, especially focusing on whether coupling RTM market with SCED market is any beneficial. Now my question is, in layman terms, why should coupling in RCC -- sorry, RTM and SCED be considered, if you can like conceptually explain rather than coupling in the overall market?

See, CRC in the order which was issued in the month of February, they have very clearly mentioned that they did simulation for 3 months. And based on the data, they did not find any merit in coupling. Only RTM market or only their market on the 3 exchanges. So the -- one of the suggestions which they received was to couple the RTM and the SCED, and just to explore it further, they have given the order to Grid-India to do the simulations and see if there is a merit in that. But let me tell you, SCED and RTM are 2 different kind of markets. SCED is basically among the generic stations who have long-term power purchase agreements where the fixed cost is assured under the PPA. They sell power on the basis of the variable cost, regulated variable cost. In case of RTM market, the generators are merchant generators and they have to recover the fixed and variable cost to the market. And even the coal, which is given to the PPA generators is through the FSA route at that administered price, whereas the merchant generator could buy coal from the [indiscernible] route. So I think these 2 are 2 different sets of generators. So theoretically speaking, coupling between these 2 set of generators is something not desirable. But then some simulation studies are going on and what we -- I mean, we and also -- we also know about that -- what kind of benefits they're getting in the SCED and how much of volume is getting cleard in the SCED, all these data is available in the public domain. And if you couple these 2 markets, significant benefit is not going to happen. The incremental benefit is going to be very, very low. And I don't think for that kind of a small benefit, CRC will go ahead with -- I mean, implementing this kind of a coupling is very, very, I mean, cumbersome activity, and it also involves cumbersome financial and physical settlement profits. So I don't think it is worth sticking off that trend, but then we are waiting for that study report and then CRC order thereafter.

The next question is from the line of Chirag from Keynote Capitals.

Am I audible? Would it be possible for you to give market share product-wise?

Yes. So in day-ahead market and [indiscernible] market, which are collective segment, our market share is 99.5%. In the bilateral market, let me just read it out, just allow me. So in the term-ahead market, our market share is about 40%, which overall, on a total basis, it makes it 82.7% or 83% in electricity. In certificates, it is 60%. And overall market share in H1, first 6 months is 79%. Electricity it is 83% and certificates it is 60% and total is 79%.

Right. Sir, second, I wanted to understand one thing as earlier part [indiscernible]. There was one simulation taking place related to RTM in [indiscernible] made it through because we already have the volumes were used to [indiscernible]. So even if there is a market coupling, is this sold RTM came and [indiscernible] market coupling goes forward also. Does that mean all the products will be coupled or it will be just 2 of these products in the market?

We don't want to comment on that. Let's see as we decide about it first. And thereafter, we will talk about this. As of now, the simulation is basically for RTM and SCED.

Third question, I just wanted to have a view. Is there any internal discussion in the management team going on related to change in dividend policy? We don't require discuss amount of cash for bringing new products itself, has there been any talks related to slab-based dividend model taking place and changing from the current 65 percentage of the...

As of now, there is no such thinking about it. We are giving 65%, 70% kind of profit in the form of dividend, and that's a good dividend payout. We are also working on other initiatives as I told you in the past, gas exchange is doing well. We are also working on coal exchange, which is government [indiscernible] talking about that. And there are EPR discussions going around. Carbon exchange is another opportunity. So I think for all these things, money will be required, so we are keeping that money for that purpose.

Will it be possible for you to let a broad ballpark on -- what kind of money would be required for bringing [indiscernible]?

See, even in case of power exchange also since we are counterparty to both the sites, we have to make payment to the sellers even if we are not getting payment from a buyer. And there have been some instances where there was 1 or 2 days delay in making the payment by the buyer. So we have to have enough surplus fund with the company to take care of this kind of payment. So I think the present surplus is about INR 900 crores which is the investors' money, which is available in the company. It is not very high. But then yes, in future, we can think about a special dividend if there is a need.

The next question is from the line of Viraj Mithani from Jupiter Financial.

Congratulations sir, for the good set of numbers. My question is again on coupling. In case the coupling goes so how are we going to be affected. Like, I mean, because we are the leading exchange in the -- we have first-mover advantage to0. Can you give some color on that? I know it's too early to comment, but if you can give.

I'm very sure coupling is not going to happen. So let us not worry about that. And in case coupling happens, we have ways and means to ensure that we are able to return our market share. And we're almost pretty sure when it come to that, okay?

The next question is from the line of Devesh Agarwal from IIFL Securities.

Again on continuing on market coupling, if you could help us understand whether this URS power that has been coming into the RTM market, in any way, does that kind of bring down the benefit that could have possibly come out by coupling the SCED with RTM market or doesn't impact?

See, number one, SCED volume itself is very less. It was earlier about 30 million, 35 million units per day, whereas the RTM market volume is about 100 million units. And after this government new rule of sale of URS power on the exchange platform, we are seeing that in the RTM market, on an average really about 20 million units of this URS power is being sold through the market itself. So that means that opportunity available for further optimization in the [ scare ] market is further reduced. So today, the [ scare ] market is less than 28 million units per day. So I think the optimization opportunity is definitely further reduced. And if all generators, they participate in the DAM and RTM market, the URS power is sold, there will be practically no optimization opportunity by coupling and RTM.

Understood, sir. And secondly, sir, if we see the numbers for the October, you said there is some growth. But if we see for our numbers in the month of October, we are seeing that there is a month-on-month decline. And the decline is largely in the RTM segment, where volumes have come by -- come down by 20 to 25 MUs on a daily basis. So any particular reason for this, sir?

Yes, month-on-month, there is a decline. But if you look at year-on-year, there is a positive number. And month-on-month, month of September is slightly hotter in [indiscernible] month? Again demand is also there because of that, the demand was high in the country. Now demand also has reduced. And fortunately, availability of generating units is high. So that is why I think volume is on a month-on-month basis reduced. But we are -- our comparison is mainly on a year-on-year basis. As you will see on every month, I mean next year, November is going to be further colder month and the demand may further go down. But if you compare with respect to last year, that is the basic comparison what we do.

Understood, sir. And sir, I think you touched upon in your introductory remarks, this CREC regulation, which came at the start of the month around TAM pricing. Could you just explain a bit better what does the draft paper talks about? And how would this impact the TAM market? And does this benefit or impact us in any way if this were to be implemented?

See, first, it is basically to streamline the transactions in the TAM market. Today, there are multiple products and exchanges were given the flexibility to introduce whatever product they feel like. And as a result of that, different exchanges have introduced different kind of products. So there is no standardization in that. And that is why the liquidity in this market is getting fragmented across these different products. So CREC has now decided to streamline this activity, and there will be standard products available in the market so that buyers and sellers can see what is there available for the sale and what they want to buy. And I think this is a very good initiative of the CREC, and it is good for the market.

But does it impact any of our segment volumes or no, not really?

It doesn't impact that, and I'm sure we'll be a larger beneficiary of this.

Understood. And lastly, sir, you talked about diversification and you spoke about EPR trading and coal exchange. So among this one, which one do you think has the largest potential in terms of becoming sizable? And secondly, which is the one that you think will be started first or will commence operation soon?

So both questions are difficult to answer because both these initiatives are dependent on the government decision. Coal exchange, I mean, I've been hearing about it from the last 1 year and Honorable Minister of Coal also had made statement earlier that it is a part of the 100 days and the 100 days are over. In the last week also, he said that, yes, we are going ahead with the coal exchange. So I think only after a decision is taken by the government in this regard, then only we will be able to start work on that. And then after that, we will have to approach the regulator whoever is the party identified for this propose and take approval and thereafter launch. I think it will need some time. It will dependent on the government approval. But once approval is there, after that, we will need maybe about 6 months to 8 months' time to start. similar cases in the EPR trading. EPR trading also draft regulations have been issued, and we have received the public comments. They are in the process of finalizing the regulations. Once the regulations are finalized, then they will appoint the agency for the purpose of EPR trading. So -- and there multiple parties may apply and then it depends whom they collect. So we have good chances to get collected, but then there is opportunities available to everybody.

The next question is from the line of Vishal Periwal from Antique Stockbroking.

Sir, on this REC transaction fee that we have revised, I mean, just wanted to understand the rationale for it. When the volume for any product when it's going strong, what was the reason of reducing the fee that we charge?

No, since the rate for the RECs, those grow substantially reduced. And so we felt that transaction fees should also be reduced because rates earlier were INR 1,000, it came down to almost about INR 120...