Indian Energy Exchange faces a "regulatory storm" with heightened policy uncertainty despite recent court developments that have lifted investor sentiment, according to Bernstein Research. The brokerage maintains a cautious stance on the power trading platform amid the ongoing market-coupling debate.

Bernstein Maintains Underperform Rating

Bernstein reiterated an 'Underperform' rating on IEX, emphasizing that regulatory risks, rather than operating performance, will be the decisive factor for the stock. The brokerage identified three critical issues for IEX: market coupling, transaction charges, and trading volumes.

"Market coupling – IEX presented a strong case in the last APTEL hearing, and we see reasonable odds of APTEL asking for a re-evaluation of the timing of market coupling – which could be a temporary positive," Bernstein noted. However, the brokerage cautioned that any delay in coupling could reopen a more damaging debate.

"If coupling gets pushed out, we see high chances of a discussion paper on transaction charges proposing a reduction in basis benchmarks and industry ROE norms. This is the biggest reason for our underperform rating," Bernstein warned.

Stock Rallies on Tribunal Developments

Despite Bernstein's caution, IEX shares have rallied sharply this week. The stock performance showed significant momentum:

The rally followed developments in the market-coupling case before the Electricity Appellate Tribunal (APTEL). During hearings on petitions challenging the market coupling framework proposed by the Central Electricity Regulatory Commission (CERC), APTEL raised pointed questions on how the rules were formulated.

The tribunal remarked that the regulator should have acted independently while drafting the framework and flagged concerns over what it described as excessive theatrics during the process. APTEL has fixed January 9 as the next hearing date and reportedly informed CERC that if it signals a potential withdrawal of the order, the case could be closed by Friday.

Q3 FY26 Operating Performance

IEX reported steady operating performance for the December quarter in its Q3 FY26 business update released on Monday. The exchange demonstrated resilient volume growth despite challenging market conditions:

During the quarter, improved supply from hydro and wind sources, along with steady coal-based generation, enhanced supply liquidity on the exchange platform. This contributed to softer power prices across key segments, reflecting better supply-demand dynamics in the power market.

Market Focus on Regulatory Outcome

Bernstein struck a more constructive tone on operating momentum, noting that volumes "should remain supportive with good coal availability and even some renewable plants being forced to sell on the exchange." However, the brokerage's assessment reflects that even if near-term legal relief emerges, the broader regulatory debate, particularly around transaction charges and returns, continues to cast uncertainty over the investment case.

The market's focus remains on the outcome of the market-coupling case, with investors closely watching APTEL proceedings for signals on the regulatory framework's future direction.

Indian Energy Exchange shares continue to attract market attention as investors await a crucial regulatory verdict on market coupling that could significantly reshape India's power trading landscape. The proposed reform has created sustained uncertainty, with market participants closely monitoring developments that could determine the exchange's future competitive position.

Valuation Impact of Regulatory Uncertainty

According to Rupesh D. Sankhe from Elara Capital, concerns around market coupling have already led to substantial valuation derating over the past two-and-a-half years. The regulatory overhang has significantly impacted investor sentiment despite strong operational fundamentals.

"Earlier, it was trading at close to a 45–50 PE multiple; now it has corrected to a 27–28 PE multiple, mainly because of the market coupling impact," Sankhe explained. He emphasized that fundamentals remain intact, with volume growth continuing to be robust despite the regulatory uncertainty.

Strong Operational Performance Continues

Despite regulatory headwinds, IEX has maintained strong operational metrics. The exchange reported electricity trading volumes of 34.08 billion units in Q3 FY26, marking an impressive 11.9% year-on-year growth. This performance underscores the company's resilient business model amid challenging market conditions.

Market Coupling Concerns and Competition Impact

Sankhe highlighted that market coupling could significantly impact price discovery efficiency, which has been a key competitive advantage for IEX. "Currently, because of high liquidity on IEX, participants benefit from better price discovery. But if market coupling comes in, all three exchanges will get equal shares, and there will be no efficiency in price discovery," he warned.

The analyst noted that IEX has argued the regulation was pushed through hastily, citing concerns over transparency and the use of simulation data rather than real-time market data. The estimated quarterly benefits from market coupling simulations were limited to approximately ₹38.00 crore.

Downside Scenario and Valuation Outlook

Under a market coupling implementation scenario, Sankhe outlined potential significant impacts on financial performance. With Day-Ahead Market (DAM) and Real-Time Market (RTM) together accounting for nearly 78% of IEX volumes, the exchange could face substantial market share loss and pricing pressure.

Rerating Potential on Favorable Outcome

Conversely, any favorable regulatory outcome could trigger substantial rerating opportunities. "Certainly, any favourable outcome, or if members of CERC decide to withdraw market coupling, will be hugely positive for IEX," Sankhe noted, suggesting significant upside potential if regulatory concerns are resolved favorably.

With the regulatory verdict expected soon, investors are preparing for heightened volatility as the decision could determine whether IEX experiences meaningful rerating or faces further valuation pressure in the coming months.