IEX Gets Bernstein's 'Market-Perform' Upgrade On Strong Volume Recovery

Bernstein has upgraded Indian Energy Exchange Ltd. to 'market-perform' from 'underperform' and raised its target price to Rs 160 from Rs 152, after maintaining a cautious stance for the past three years. The change in view is driven by strong volume growth and limited but emerging support from the derivatives segment, though regulatory risks still warrant caution.

Previously, Bernstein held an 'underperform' rating due to two key concerns: regulatory overhang and muted volume growth. On the regulatory front, the main worry was IEX's transaction charge, currently around 1% of product value—among the highest globally—which Bernstein considers unsustainable. The second issue was the expectation that renewable power, tied up in long-term contracts, would not significantly contribute to exchange volumes.

However, recent developments have shifted the narrative. IEX has seen robust volume growth, helped by increased coal availability, moderating power demand growth, lower spot prices, and rising participation from renewable energy producers. The entry of merchant renewable power, particularly in the context of transmission delays and potential battery storage, is expected to further support exchange activity.

On the derivatives front, while not seen as transformational, Bernstein acknowledges their potential. Given that 90% of Indian power is under long-term PPAs, the derivatives market is unlikely to be driven by hedging needs. However, speculative trading—especially in options—could lend support.

By 2030, derivatives could reach around 30% of spot volumes, compared to over 10 times in European markets, Bernstein estimated. For now, only futures contracts are planned, with IEX expected to earn a share of the transaction charge, through use of its spot market reference.

Despite the upgrade, Bernstein has refrained from moving to an 'outperform' rating due to regulatory uncertainty. The biggest overhang is the prospect of market coupling—a policy move that would unify price discovery across all exchanges. Bernstein assigned a 50% probability to its implementation and believes the stock already partially reflects this risk.

Going forward, clarity on market coupling or transaction charges will be key catalysts. Bernstein sees the possibility of one regulatory change, but not both, in the near term.