IEX shares roiled: What is 'Market Coupling' mechanism and what should one do with the stock?

IEX share price: Indian Energy Exchange (IEX) shares have been reeling under immense selling pressure. The company's March quarter results were also sombre, as it posted an almost flat consolidated net profit of Rs 88.33 crore for the March 2023 quarter. It had reported a consolidated net profit of Rs 88.40 crore in the year-ago period. Total income rose to Rs 129.58 crore from Rs 128.44 crore in the same period a year ago, while it achieved an overall trade volume of 26.1 BUs (billion units) as against 27 BUs a year ago due to supply-side constraints. For the full fiscal year, too, the volumes declined. IEX traded 96.8 BU during FY22–23 as compared to 101.9 BU, mainly due to sell-side liquidity constraints.

Besides, reports that the power ministry has directed the Central Electricity Regulatory Commission (CERC) to undertake the ‘Market Coupling’ mechanism for spot power trading dented investor sentiment further as investors started selling the shares aggressively. On Thursday, the stock ended nearly 9 per cent lower at Rs 136.50 on the BSE, and on Friday, the stock continued to bleed. It slipped another 15 per cent and hit a fresh 52-week low.

So, what is the cause of worry for investors, and what should one do with the IEX shares now? Let's understand this one by one. 

What is Indian Energy Exchange and what does it do? 

Indian Energy Exchange is India’s leading energy marketplace, providing a nationwide automated trading platform for the physical delivery of electricity, renewables, and certificates. IEX is approved and regulated by the Central Electricity Regulatory Commission and has been operating since June 27, 2008, as per the company's website. IEX's shares started trading on exchanges (NSE and BSE) in October 2017.

All about Market Coupling

Market coupling is the process whereby collected bids from all the power exchanges are matched, after taking into account all bid types, to discover the uniform market clearing price for the day-ahead market or real-time market. This is done to harmonise different systems of electricity exchanges and, in particular, to reduce price differences. So, under the market coupling mechanism, one price will be set for all the exchanges. Currently, the price discovery on all the platforms is different. After the implementation of this mechanism, all these exchanges will be platforms just to receive the bids, explains Zee Business Research.

What's the current status?

At present, around 94 per cent of spot market transactions take place on IEX. Hence, it has a clear monopoly. Under the market coupling mechanism, orders received from different power exchanges will be added to pass only one algorithm. As per Zee Business Research, this mechanism will help new companies enter the exchange space, and the dependence on IEX to decide the power price will reduce. This will have a huge impact on IEX's volumes. In addition, it is also believed that it will kill innovation.

Risk to IEX's business model

According to Zee Business Research, the market coupling mechanism poses risks to IEX's businesses in the day-ahead market (DAM) and real-time market (RTM) segments. At present, IEX enjoys a 90 per cent market share in total market volume. Further, IEX may lose its status as the most trustworthy exchange for price discovery. In the worst-case scenario, the volume share of DAM/RTM segments can go down to 33 per cent from 100 per cent. Moreover, once this mechanism comes into effect, bidders won't have any reason to choose IEX, the research desk further said.

When will this be implemented?

As per some analysts, the implementation will take at least three years. Tasks such as draft consultation papers, discussions with stakeholders, and other approvals are pending.

EXCLUSIVE | IEX's CMD's reply

In an exclusive interaction with Zee Business, the exchange's CMD, Satyanarayan Goel, said that the market coupling matter will be taken care of by CERC, and the regulator will take a decision on it after a discussion on the same. The CMD further said that there is a time for a final decision as all stakeholders will share their opinions on it.

What should you do with the shares? Analysts' views

Sameet Chavan, Head of Research, Technical, and Derivatives, at Angel One Ltd., says, "Stock prices tumbled in the last couple of sessions after the reports said that the power ministry has directed the CERC to undertake the ‘Market Coupling’ mechanism for spot power trading. Technically speaking, we do not see any near-term relief in the prices, as the decline is backed by humongous volumes. The stock is trading at a new two-year low, and hence, we advise traders to stay away from the stock until things stabilise."

Antique Stock Broking has double-downgraded IEX shares to ‘sell’ from ‘hold’ with a revised target price of Rs 105 per share against Rs 138 apiece earlier, while Axis Securities has also downgraded the stock to ‘sell’ from ‘buy’ with a revised target of Rs 111 per share from Rs 180 per share earlier.

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