Jitendra Kumar GuptaMoneycontrol Research
Indian Energy Exchange (IEX) is one of those rare companies that makes more money than required by its business. Since there is no major capital expenditure required to scale the business, it currently has a cash equivalent of around Rs 450 crore (1.6 times its net worth), which is quite high. What is surprising, despite the high component of cash in the balance sheet, is that it generates a return on equity as high as 50 percent.
This could turn out to be the perfect situation to utilise the cash and create value for shareholders. That is why the company has come out with a buyback of its shares. After the news, the IEX stock closed with a gain of 4.3 percent at Rs 163 per share on Friday. Our calculations suggest that at the current market price, even if the company is able to utilise 50 percent of cash on its books, it would be in a position to buy back close to 4.5 percent of its paid-up equity.
Earnings Accretive
This would not only provide support to its share price, but would also be earnings accretive. To put all this in perspective, this year the company is expected to make a net profit of Rs 169 crore, and an EPS of Rs 5.5 per share. If the company is able to buy back 4.5 percent of its outstanding equity shares, that would lead to about a 5 percent improvement in its earnings in FY19.
Importantly, IEX, which operates a power trading exchange and has a market share of 97 percent, would do this exercise at a time when the company’s earning profile is improving as a result of the increase in power demand and higher merchant tariffs.
Moreover, its return ratios (return on equity and return on capital) would improve as result of reduction in cash as a component of the overall capital deployed in the business. Besides, a buyback would be relatively tax-efficient compared to paying out dividends, which will attract dividend distribution tax.
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