Global brokerage Bernstein has revised its stance on Indian Energy Exchange (IEX) shares, upgrading them to 'Market-Perform' from 'Underperform.' Concurrently, the firm adjusted its price target for IEX to Rs 110, down from its previous estimate of Rs 115.
Regulatory Delays Reduce Near-Term Risk
The primary driver behind Bernstein's upgrade is the extended timeline for market coupling, which the brokerage now anticipates by the end of fiscal year 2028. This pushback by approximately one year significantly lessens the near-term regulatory risks associated with the change. Bernstein noted that its long-standing thesis regarding the unsustainability of IEX's transaction charges remains, expecting them to soften due to competition or regulation. However, it currently considers the stock fairly priced for its base-case scenario.
Long-Term Volume Growth Potential
Looking ahead, Bernstein sees potential for medium-to-long-term volume growth for IEX. This optimism stems from the government's increasing focus on market-based power products. Specifically, the formalization of virtual power purchase agreements (PPAs) and ongoing tenders for the first contract-for-difference renewable projects are expected to drive exchange volumes in the coming years.
Near-Term Challenges and Transaction Charge Outlook
Despite the long-term potential, Bernstein projects soft volume growth for IEX in the near term. The brokerage identifies supply, rather than demand, as the biggest constraint, citing factors such as weak hydropower generation and coal shortages offsetting strong power demand.
Transaction charges continue to represent a significant potential negative catalyst for IEX. The Central Electricity Regulatory Commission (CERC) had previously highlighted in a 2023 discussion paper that these charges should be benchmarked against global levels and the inherent risks of the business. However, Bernstein believes the immediate risk is low, as the regulator is likely to await the implementation of market coupling before making any decisions on transaction charges.