This I believe is a late post on this subject as most of you have already heard the story of IEX- India is a large country with huge power production and demand but very little power trading. In Europe and the US, power/energy trading is almost over half of all that is produced and India will catch up. Hence, the runway and opportunity size is extremely large.
We witnessed a sharp surge in IEX price last year when it almost went up 4x in a matter of six odd months and became one of the darlings of the then roaring market. It also issued bonus and is now down close to a third of its all time high.
So what’s my take in this. I have to be honest that I didn’t buy into the story the whole of last year, especially around the time when it was a clear buy- a pre bonus level of sub 400. I actually was happy that my BSE position was beginning to be rewarded and at that time, I was only slowly waking up to the idea of buying growth stories. So I missed the bus completely.
However, I did follow the stock closely, not just the price but also the business. I was surprised when Mohnish Pabrai and Guy Spier both showed large interests in it( here’s a link- https://youtu.be/f_2Smx_1hDM and https://youtu.be/PpEDGdILAEU) I totally missed it until a few weeks back when I was researching more of the upcoming power exchange by BSE.
The key in a Bull Market is to keep some stocks on your radar and then when they’re down but not out, dig deep into their businesses and see if you can add or build your potential. IEX was one of the stocks and it kept popping up my radar. It ticks all my boxes, high profit margins, long runway for growth, operating in a market with huge tail wind especially when the government of the day is pushing hard to take energy trading to over 25% in a few years. So what stops me from owning this one?
My position in BSE is a reason I never looked to own either MCX or IEX. It’s one problem which occurs to most people while taking large bets on similar companies that when you know both the bets are good, you somehow develop one of them and say- this covers me on this one easily so why both. Also, I’m a firm believer in making large bets, atleast 5% of my portfolio to begin with and with BSE being almost a third of my entire worth, I never thought IEX will own much value.
However, of late I have developed a liking to buy long term stories which potentially can go up atleast 5-10x without much stratospheric to happen. And when you hit one of those bets, all you do is to raise that position and hold through all the volatility. BSE for me is that bet where I believe the runway for growth is exceptionally large and it can be a ten bagger from here atleast.
Now, what about IEX? Can it live side by side with BSE in a portfolio and even NSE potentially? Well, the answer is a very close yes. I operate with a thumb rule. Whenever I look to decipher on the India oppertunity, I see what similar stocks have done in the US and Europe. So I dug deep into the European energy stocks, especially the European Energy Exchange, owned by the Deutsche Bourse group. It’s a massive cash machine, generating over 1000 crores annual profits, without much capital. The real eye opener was however when I checked its annual report. It says it’s main competitors are the ICE group ( which owns the NYSE), Nasdaq and the CME group.
So I checked out their numbers and I couldn’t believe myself. For the Intercontinental exchange group, the total revenue from exchange operation is close to $3.8 Billion and of which close to $1.2B is energy trading!!! Only 300million dollars is the equity trading revenue. Similarly, NASDAQ earns over 1/6 of its annual revenue from trading energy derivatives. So potentially, Energy trading in India can generate more money than what NSE or BSE can ever make in their equity devisions.
BSE recently talked in their concall about their readiness to operate its own power exchange- Hindustan Power Exchange and that they’re eager to launch power derivatives once it gets launched with SEBI approval in India. Also, BSE is about to launch its Gold Spot exchange. Both these businesses will be revenue accretive from the word go.
A big selling point for IEX is it’s near monopoly in spot power trading. The only thing I have to check is if BSE can make a dent to the tune of atleast 25-30% in this market in one quarter of its launch. Because if it doesn’t, the final box will be ticked and I’ll lap all the IEX I can because doesn’t matter what happens, power trading will generate humongous amount of money in India going forward.
this is the first time I’m writing before owning a stock as I wanted to talk out loud on this subject. The only thing which this research did was to make me believe even more fiercely in the BSE story as even in Europe, all three major exchanges have substantial market share in energy derivatives so it won’t be a one man show for IEX. The whole market will be enough for a lot of money to be made by all players.
So here’s my takeaway- for all of us waiting for NSE IPO for a rerating of BSE are looking at the wrong item. BSE will be rerated based on its blue ocean businesses- gold spot exchange, and hopefully power exchange. And to any of you who think that 2300 is a large price to pay, imagine what will happen when it will eventually become a $20B business in 20 years( share price of close to 40000)
Life is all about Compounding! 