Rohit Bajaj, Executive Director – Business Development,Strategy and Regulatory Affairs, IEX, says Now that the new regulation has come, this is GNA regulation where you can avail, you can take open access or you can schedule power up to 11 months in advance under short-term market. What we are doing is taking advantage of the regulation which is there, which is very market-friendly regulation, we are going to apply very shortly. “We are hoping that by January, we should be in a position to launch this contract.”
The volume growth that you have clocked in has been fairly encouraging. Do you think that we can see a further margin expansion owing to the operating leverage?
This last quarter was very good for us, Q2, where we registered close to 15% growth in overall volume terms. And after that, in October, we saw a huge demand increase. So on a year-on-year basis, the overall country’s demand increased by about 22% and we got the lion’s share of it. Our volume also increased by 20% in October. In the first seven months, we are at 12% and going forward as the supply constraint will further ease out because November, December, January, February, are generally the months where large supplies come in as not all the states are drawing.
This is also the time when prices go down a little and then states start to take advantage of the market. They leverage this low price electricity which is available on the exchanges and try to replace their costlier supplies. We expect that going forward, we should be able to scale up this growth further and take benefit of the supply constraints which are easing out.
You already showed a very interesting 200 basis point expansion in margins this quarter. If the volume outlook from here on is good as you are sharing right now, would it be coupled with higher margins as well or they will roughly be around current levels?
In margin, we are at a very high level already. We believe that it is going to be at the same level or a little bit on the positive side because the expenses are more or less fixed and whatever increase in volume is happening helps us improve the margin. So, not too much expectation on that front but yes, volume growth will drive higher profitability and higher margins.
Are margins a function of the volume or are margins going to be independent of that?
Margins are definitely a function of volume. It is driven by volumes here.
There is a pattern; we have always seen that winter demand is always higher than summer demand. Right now the merchant power prices have really gone through the roof. So at a time when we are looking at an uptick in electricity demand and a big uptick in merchant exchange pricing, how will that change your landscape from last year versus this year?
It is not always that winter demand is more than summer demand. Generally, we see that summer demand is little on the higher side and then monsoon demand is also high depending on how good or bad the monsoon is. Winter season is particularly where we have demand coming up only during the morning hours and something in the evening hours also. Largely, on an average, this demand is not very high. What happens in these months is normally we see the price is going down.
Till now, our average price at exchange is about Rs 5.50. The November price has come down to close to Rs 4 and we expect prices between Rs 4 and Rs 5 in months to come. When the prices are on the lower side, state distribution companies try to optimize their power procurement cost. Today, majority of the power is tied up under long term and when they have so much capacity coming through or so much energy coming under long term, they identify which is the costlier one. So they replace that costly power with the exchange procurement which helps us increase our volume. We expect going forward this trend will help us gain in volume, though on an overall basis, demand would not be as high as summer months, but it would be there and it will help us get more market, more volumes.
I have the number for Q3 FY22 and the total volume was 27.7 billion units. What you have clocked for the quarter gone by is 16.5 billion units. It is almost a 30-35% drop from two years ago. Why is there such a drop?
Two years back was the Covid time. This was the time when overall demand in the country was very low and the prices were also at the lowest level. Historically, the lowest price was during the time you are mentioning and this is the time when all the states, left, right, centre, were replacing their power and we were getting huge demand. Subsequently, when all of a sudden we had seen increase in demand across the country, certain supply side constraints also emerged.
You may be aware that imported coal prices were at an all time high level. The gas prices were also at extremely high levels and so there was not enough supplies available. In the last six-seven months, or about a year, we have done a lot of groundwork within the country. State government has taken many initiatives today, all of our imported coal-based plants are running.
Today, coal production has increased by 15-16% in Q2. On an overall basis, it has increased by 12% and with all these things coming in place, we are getting more and more supplies. So the comparison probably is not right, because those were two years when we registered a 25-30% increase in volume. Last year it was flat. This year we are expecting more than 15% increase in volume on an overall or annual basis. H1 was already 12% up; in Q2, particularly October, it was more than 20% up, and we hope that this trend will continue. We are working to ensure that this trend will continue for the coming months also.
You are also looking at introducing longer term 11-month contracts. Have you filed them with the CERC? What is the update there?
We are going to file it very shortly; our internal preparation has been done. Till now, we have contracts where the procurement can be done up to only three months. But there is a requirement in the market, particularly distribution companies, where they want to do some advanced planning and buy power in advance to meet their seasonal requirement.
For example, Punjab, Haryana – all these states have agriculture requirements starting from June. They want to do procurement somewhere in January, February. So the three-month window that we provide them is not sufficient. Now that the new regulation has come, this is GNA regulation where you can avail, you can take open access or you can schedule power up to 11 months in advance under short-term market. What we are doing is taking advantage of the regulation which is there, which is very market-friendly regulation, we are going to apply very shortly.
We are hoping that by January, we should be in a position to launch this contract. If we are able to do that, then the entire next year demand we should be able to cater to because the procurement cycle starts somewhere in January and goes up to March. If we have the right kind of 11-months contract at that point in time, it should help us in scaling up our volume in this bilateral market also. This is going to be a new segment.