Bernstein has downgraded Indian Energy Exchange (IEX) to Underperform and set a target price of Rs 99 per share, implying a 29% downside from Monday's close. The brokerage cited regulatory risks from market coupling as more severe than previously anticipated.
The Central Electricity Regulatory Commission (CERC) last week approved a phased rollout of market coupling across power exchanges in India, beginning with a three-month pilot. Under this model, pricing power will shift from individual exchanges to a central authority.
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Bernstein said IEX is unlikely to succeed in challenging the order, as it aligns with a 2021 power market regulation that describes market coupling as essential to promoting competition. While IEX has announced plans to contest the directive, Bernstein said it sees limited prospects for success.
The brokerage flagged additional risks from a discussion paper on transaction charges and the absence of entry barriers for new exchanges. The current transaction fee is four paise, which represents over 1% of the product's value. Previous resistance to reducing this charge stemmed from concerns that it would hurt the two largest exchanges.
Bernstein noted that following the market coupling directive, chances of a reversal in the transaction fee proposal are minimal. It added that rising competition could lead to lower prices, which would pressure IEX's margins.
The firm also pointed to developments in a proposed power bill that would remove state-level entry barriers. A previous proposal requiring firms with under 20% market share to exit the market has been dropped. Now, companies with a minimum net worth of Rs 50 crore can launch an exchange, paving the way for large power traders such as Manikaran to enter, Bernstein said.
Bernstein has maintained a bearish stance on IEX for the past three years. In the past month, the brokerage had noted strong trading volumes and the stock touching its highest-ever target of Rs 150 per share.
“Our fears were always around regulatory risk from coupling and transaction charges,” the brokerage said. It added that while it initially believed regulators might not implement the changes, recent statements from both authorities and market participants indicate otherwise.
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