Should You Invest in IEX Ltd.? Stock Analysis by Finology

Indian Energy Exchange Ltd. (IEX), the largest power trading platform in India, has consistently delivered a strong return profile with over 40% Return on Equity (ROE) sustained across the last decade.

This week, the Finology Research Desk took a deep dive into IEX to assess whether the company’s fundamentals align with our long-term investment framework. Is it a compounder in the making, or a business at the crossroads of structural risks? Let’s explore.

What Makes the Power Trading Industry Special?

India is currently the third-largest electricity consumer in the world, powered by a diverse energy mix. The country sources its electricity from both conventional sources like coal, lignite, natural gas, oil, hydropower, and nuclear, as well as renewable energy sources such as wind, solar, biomass, and bagasse.

Interestingly, while renewable and hydro-based capacities account for ~46% of India’s total installed generation capacity, their contribution to actual electricity generation is disproportionately low — at just 22%. This gap highlights the underutilisation of cleaner energy sources, despite their growing presence in infrastructure.

Moreover, India’s consumption of electricity remains structurally underpenetrated. While it is the third-largest consumer globally, it ranks only 23rd in per capita electricity consumption. To put this into perspective, India’s per capita electricity usage is about one-fourth of China’s and one-tenth of the United States’.

This massive gap in per capita consumption offers long-term growth potential. As the Indian economy continues to expand — driven by industrialisation, electrification of transport, digitisation, and rising rural access — electricity demand is expected to grow at a 5% CAGR over the long term.

Understanding the power sector’s dynamics requires examining its various stakeholders. Here’s a breakdown:

• Power Generators: Entities that produce electricity from their power plants. They sell electricity to DISCOMs, trading firms, or power exchanges. Examples include NTPC, Adani Power, etc.


• Traders / Power Exchanges: Platforms or intermediaries that facilitate the buying and selling of electricity. Indian Energy Exchange (IEX) and Power Exchange India Ltd. (PXIL) are two major power exchanges in India.


•  Transmission Companies: These transport electricity from generation points to consumption centres. Power Grid Corporation of India is the largest player in this segment.


•  Distribution Companies (DISCOMs): These companies procure power — either directly from generators or through traders/exchanges — and sell it to end consumers. Examples include CESC Ltd. and various state government-run distribution companies.

Load Dispatch Centres: These play a crucial coordinating role, ensuring the real-time balance between electricity demand and supply. They facilitate smooth operations between generation, transmission, and distribution. The National Load Dispatch Centre (NLDC) and various State Load Dispatch Centres (SLDCs) are key examples.

Each of these segments operates under distinct business models and economic characteristics. Power generation and transmission are both highly capital-intensive segments. They require large upfront investments and face high competitive intensity, given the number of players and the long gestation period for returns. We’ve earlier covered the business model of power generation companies in detail — you can refer to our earlier article for that deep dive.

DISCOMs are widely recognised as the weakest link in India’s electricity supply chain. Years of accumulated operational inefficiencies, chronic underinvestment in distribution infrastructure, and the absence of timely tariff revisions have eroded their financial sustainability. These issues continue to impact their ability to recover costs and operate profitably.

Load Dispatch Centres, on the other hand, are government-regulated and run under a statutory monopoly. Private players are not allowed to enter this segment.

Amid this landscape, power exchanges stand out. They operate on a tech-enabled, asset-light model and face limited competition. This makes the exchange-based model not only scalable but also structurally attractive in terms of margin potential and return ratios.

Electricity trading takes place in two broad formats:

• Long-term Power Purchase Agreements (PPAs) — fixed contracts, often running for years
• Short-term contracts — traded through exchanges like IEX

Source: CERC

In FY24, short-term contracts made up around 12.5% of India’s overall electricity generation. Power exchanges contributed to ~56% volumes transacted in the short term power trading market. What's more important is the trend: from FY10 to FY24, power exchange volumes grew at a CAGR of 22.4%, while volumes through traditional traders grew only 3.1% CAGR.

This shift signals growing preference for short-term, liquid, market-linked power contracts, positioning power exchanges as a rapidly growing segment.

With that in mind, we turned our attention to India’s dominant exchange in this space — Indian Energy Exchange Ltd., which enjoys a commanding ~84.2% market share.

Business Model of Indian Energy Exchange Ltd.

Founded in 2008, Indian Energy Exchange Ltd. is licensed by the Central Electricity Regulatory Commission (CERC). Its core mandate is to provide an efficient, automated platform for:

• Spot electricity trading
• Renewable Energy Certificate (REC) trading
• Energy Savings Certificate trading

The exchange facilitates physical delivery of electricity through a technology-driven, transparent, rule-based platform — ensuring fair price discovery and efficiency for all market participants.

Over the years, IEX has made efforts to diversify into adjacent energy markets. Key ventures include:

• ICX (International Carbon Exchange Pvt. Ltd.):
   Launched in 2022 as a wholly owned subsidiary, ICX is a carbon credit trading platform that allows participants to buy and sell voluntary carbon credits. It enables efficient price discovery while aligning with India’s climate goals and global GHG reduction efforts.
• IGX (Indian Gas Exchange Ltd.): Established in 2020, IGX is India’s first automated gas trading exchange. It facilitates both spot and forward gas contracts at designated hubs. IEX holds a significant stake in IGX, and the platform aims to bring transparency and competitiveness to the natural gas market.
• Coal Exchange (Work in progress): IEX is working closely with the government to build a coal exchange platform. This could potentially streamline India’s coal supply and pricing dynamics — another important step toward becoming a one-stop platform for energy trading.

IEX Revenue Mix – FY25

Source: Company

IEX’s revenue model is largely transaction-based, supplemented by participation fees and non-core income. Here’s the breakdown:

1. Transaction Fees (~79% of Revenue): This is IEX’s largest income source. The company charges transaction fees to both buyers and sellers for executing trades on its platform — much like how stock brokers earn from trades.
   • Around 90%+ of transaction fee revenue comes from electricity trading
   • The rest is generated from trading of Renewable Energy Certificates (REC) and Energy Savings Certificates
2. Admission and Annual Fees (~3% of Revenue): IEX charges a one-time admission fee and a recurring annual fee from market participants. This revenue segment, while small, is stable and reflects customer stickiness.
3. Other Income (~18% of Revenue): Includes income from non-core activities such as interest on investments, gains on sale of financial assets, and other miscellaneous streams.
    

IEX Product Mix – FY25

Source: Company

IEX offers a variety of contracts catering to the varied needs of market participants:

• Day Ahead Market (DAM): This is a physical trading platform for buying/selling electricity one day in advance. Market participants submit bids, and prices/volumes are determined via a double-sided closed auction. Double-sided closed auction is a market mechanism where both buyers and sellers simultaneously submit their bids and offers (prices and quantities) into an electronic platform. These bids and offers are then matched based on a specific algorithm to determine the market clearing price and volume.
• Real Time Market (RTM): This segment enables physical electricity delivery 1 hour after market closure.
  • There are 48 sessions each day, conducted every 30 minutes
  • Like DAM, pricing is determined through double-sided closed auctions
• Term Ahead Market (TAM): Offers flexibility to trade electricity for durations of up to 90 days. Includes:
  • Intra-Day Contracts
  • Day-Ahead Contingency (DAC)
  • Term contracts, all aimed at providing hedging options for short to medium durations
• Green Day Ahead Market (GDAM): Part of the Integrated DAM, GDAM facilitates next-day trading of renewable electricity, supporting green energy integration. Pricing follows the DAM model.

IEX Unit Economics:

 

 

Source: Company, Finology Research Desk

Employee costs account for only ~7% of the company’s total income. These costs have remained low and stable ~8%-9% of the total income over the last few years. Employee costs are the major cost component for IEX, especially to maintain its technology infrastructure. Employee costs account for ~43% of the total pre tax costs for the company. 

Depreciation and amortisation expenses have remained low ~3% for FY25. As the company’s business is asset light in nature, depreciation and amortisation costs have remained low ~3-5% of the total revenues. 

Other expenses account for ~5% of the total revenues. These have remained low and stable over the years. Other expenses include finance costs, technology investments, legal and professional fees, etc.

Tax costs account for ~21% of the total revenues for the company. These costs have been the highest cost component for the company over the years. 

The company's net profit at ~64% of total income, has improved over the years. The company has remained highly profitable since listing, maintaining a strong net profit above 50% of the total income over the last few years. 

Porter 5 Forces Analysis of IEX Ltd.

Source: Finology Research Desk

Low Threat of New Entrants: The power exchange industry in India is heavily regulated. CERC approval is mandatory to operate. This significantly raises entry barriers.
 Currently, only three exchanges operate:

• Indian Energy Exchange Ltd. (IEX)
• Power Exchange India Ltd. (PXIL)
• Hindustan Power Exchange Ltd. (HPX)

Low Bargaining Power of Suppliers: Since IEX is a technology platform, it doesn’t engage in any physical goods trade. Hence, it faces no supplier power risk.

Moderate Bargaining Power of Buyers: IEX has over 8,500+ registered participants, including:

• 5,700+ commercial and industrial buyers
• 2,500+ renewable generators
• 1,100+ conventional power generators
• 75+ DISCOMs

While the large user base gives it leverage, the pricing must remain competitive. Buyers will naturally favour platforms offering lower costs and better liquidity. IEX has some pricing power, but must balance it with competitive pressures — especially from long-term PPAs and rival exchanges.

Moderate Threat of Substitutes: Long-term PPAs still account for ~87.5% of total traded volumes in the power market. While short-term trading via exchanges is growing, PPAs offer price certainty over long durations. So, the threat from substitutes remains moderate.

Low Competition in the Industry: IEX enjoys a dominant ~84.2% market share. PXIL and HPX have struggled to match IEX’s liquidity, technology, and participant base. Despite competition, IEX’s long-term performance and first-mover advantage continue to make it the preferred exchange.

What Led Us to Reject Indian Energy Exchange Ltd. for Finology 30?

Despite IEX’s strong profitability and market leadership, two key structural risks prompted us to exclude the company from our Finology 30 list.

1. Market Coupling Risk

Currently, each power exchange in India collects its own buy/sell bids and determines its Market Clearing Price (MCP) independently. This gives IEX a significant edge in price discovery, especially since it controls nearly all DAM and RTM volumes.

However, Market Coupling, if implemented, will aggregate bids from all exchanges and create a single, uniform MCP across India. This means:

• Power exchanges will become mere platforms for order routing
   
• IEX’s edge in price discovery will disappear
   
• Its business model will shift from that of a price-setting exchange (like NSE/BSE) to that of a neutral broker (like Zerodha or Groww)

Given that DAM and RTM account for 75–80% of exchange volumes — and that IEX dominates both — market coupling poses a serious structural risk to IEX’s core business model.

2. Derivatives Market Risk – Losing Out on a High-Margin Growth Avenue

Back in 2009, India’s first attempt at launching electricity derivatives was stalled due to a regulatory turf war between CERC (which governs the electricity sector) and FMC (then the commodity derivatives regulator).

While electricity had been notified as a tradable commodity, CERC objected to the launch of electricity forwards by MCX, citing grid impact. The regulatory ambiguity led to a decade-long freeze on derivatives contracts.

After the Supreme Court resolved the jurisdiction conflict in 2021, a clear framework was set:

• SEBI would regulate cash-settled electricity futures (like on MCX or NSE)
• CERC would regulate physical delivery-based contracts

Now in 2025, SEBI has approved monthly electricity futures contracts on both MCX and NSE, officially launching the long-awaited derivatives market for electricity in India.

However, IEX is notably absent from this segment.

This is a critical risk because:

• Derivatives are a higher-margin business for exchanges
• Cash-settled futures are more liquid, trade-friendly, and scalable
• IEX’s current dominance in spot trading does not guarantee leadership in derivatives

With MCX and NSE gaining first-mover advantage, IEX risks losing out on a structurally important market — one that could become the next phase of growth in India’s power trading ecosystem.

Combined with the looming implementation of market coupling, this could significantly weaken IEX’s long-term moat.

The Bottom Line

Indian Energy Exchange Ltd. has built a powerful, profitable, and scalable business. With ~84.2% market share, a decade of 40%+ ROE, and 50%+ net profit margins, it is undoubtedly a market leader.

But leadership today does not guarantee leadership tomorrow.

The potential implementation of market coupling could fundamentally weaken IEX’s business model by stripping away its price discovery capability. Simultaneously, the rise of electricity derivatives outside IEX’s ecosystem could erode its long-term growth trajectory.

At Finology 30, we prioritise resilient business models with a sustainable moat. Despite its operational strength, IEX currently does not pass our investment filter.

However, there are very few stocks that made it to the Finology 30. Check them out here.