IEX shares nosedive 20% for week: Your point-by-point guide to what's worrying investors

IEX share price: Shares of the Indian Energy Exchange (IEX) continued their downward spiral for the third straight day on Friday to finish the week noticeably lower, declining nearly 20 per cent to Rs 122.6 per share on BSE. The stock closed in the red in four of the last six sessions until Friday, and in the last three sessions, the shares have dropped over 21 per cent.

The power trading exchange extended its losses, with the company’s shares losing over 24 per cent of their value over the past month and nearly 33 per cent over the past year.

What triggered the slide in IEX shares?

The plummeting IEX shares are largely attributed to the Union Power Ministry’s decision to implement market coupling. This system involves an independent third party collecting the buy and sell bids to establish a uniform market price across all exchanges. This system involves the collection of bids from all power exchanges to establish a uniform market clearing price for the day-ahead or real-time market. Currently, IEX is the leading platform for electricity spot price determination in India.

Investors reacted aggressively to the implementation of market coupling, leading to a considerable selloff in IEX shares. The stock ended over 8 per cent lower at Rs 136.45 on the NSE on Thursday, and on Friday, the selling pressure persisted as the stock slipped another 10 per cent, hitting a new 52-week low.

The Issue: Market Coupling

Presently, IEX has a clear monopoly, handling over 90 per cent of spot market transactions. The market coupling mechanism will gather orders from different power exchanges, passing only one algorithm, thus setting one price for all exchanges. This mechanism is expected to encourage new companies to enter the exchange space and reduce dependence on IEX for power price decision-making. This significant shift will likely impact IEX's volumes and may stifle innovation.

Impact on IEX's Business Model

Zee Business Research suggests that the market coupling mechanism presents risks to IEX's businesses, especially in the day-ahead market (DAM) and real-time market (RTM) segments. Currently, IEX enjoys a 90 per cent market share in total market volume. This change may jeopardise IEX's status as the most trusted exchange for price discovery. In the worst-case scenario, the volume share of DAM/RTM segments could plummet from 100 per cent to 33 per cent.

Looking Forward: Implementation Timeline and Company Stance

Implementation of this mechanism could take at least three years, involving several steps like drafting consultation papers, discussions with stakeholders, and necessary approvals. In an exclusive interaction with Zee Business, IEX's CMD, Satyanarayan Goel, noted that the market coupling matter would be handled by CERC, which will make a decision following a discussion. He added that there is ample time for a final decision, as all stakeholders will share their opinions.

Analysts' Take

Sameet Chavan, Head of Research, Technical, and Derivatives, at Angel One Ltd., advised traders to steer clear of the stock until the situation stabilises due to the significant decline backed by high volumes. Meanwhile, Antique Stock Broking double-downgraded IEX shares to ‘sell’ from ‘hold’ with a revised target price of Rs 105 per share, and Axis Securities also downgraded the stock to ‘sell’ from ‘buy’ with a new target of Rs 111 per share. Furthermore, brokerage firm Nuvama considers the decision a significant negative for IEX and has recommended a "reduce" rating on the stock with a price target of Rs 127. Market expert Sandip Sabharwal has advised avoiding the stock due to its cyclical nature and susceptibility to government interventions.

Recent performance of IEX stock

Despite the bleak circumstances, IEX has managed to stay debt-free for the past five years. Still, the company has seen a decline in sales and revenue after three years of growth. Additionally, IEX recorded a year-on-year increase in overall volume in May but experienced a 30 per cent decline in market clearing price.