IREDA: Leading the Charge in India's Green Energy Revolution

India's clean energy sector is experiencing explosive growth, and the Indian Renewable Energy Development Agency (IREDA) is at the forefront of this revolution.

The clean energy champion recently announced steps to fuel its growth and support India's renewable energy goals.

On 22 March 2024, the company announced a comprehensive borrowing plan, aiming to mobilize Rs 242 bn through various financial instruments. IREDA's stock soared 5% in a day as investors reacted positively to the fundraising plans.

Since its listing in November 2023, the stock has moved up a whopping 137%. A large part of the upward trend comes from a strong set of December quarterly results and the recently announced plans.

The lender's ambitious plan isn't just a win for IREDA, it's a sign that India's renewable energy sector is about to explode.

The rise of renewables in India's power sector has been a major success story. Wind and solar now account for more than 8% of total generation, twice their share in 2014.

The distribution of renewable energy adoption varies widely across different states of India, with some regions surpassing even global standards in harnessing variable renewable energy (VRE) like solar and wind power.

This progress owes much to earnest policy reforms championed by the government. Initiatives such as reverse auctions, which have progressively driven down prices, and preferential tax treatment for developers have spurred growth.

Mandates pushing utilities to procure a minimum quota of renewable power, coupled with substantial investments in transmission infrastructure and support for solar parks, have further fuelled the expansion of green energy.

Yet, according to a report by McKinsey, there's an urgent need to gear up India for a brisk and systematic decarbonization process within this decade. Over three-fourths of India of 2050 (and 80-plus percentage of the India of 2070) is yet to be constructed.

Let's see what the sector holds in store for investors...

Green Lending Boom for NBFCs

The government's push for renewable energy offers a lending opportunity for non-banking financial companies (NBFC) focused on the power sector.

These NBFCs mainly finance power generation, transmission, distribution and related projects. They fund a range of projects including thermal power plants, transmission lines, and renewable energy ventures such as solar and wind farms.

In recent years, power financing NBFCs have grown due to increased demand for funds in the power sector and government initiatives. Outstanding credit for key players in the financial year 2023 grew at a compound annual growth rate (CAGR) of nearly 10% compared to 2019. Looking ahead, this growth is expected to continue driven by factors like rising power demand, population growth, renewable energy integration and sustainability goals.

Moreover, these NBFCs have improved their asset quality over time, with a decrease in gross NPAs attributed to the restructuring of stressed assets, write-offs, reduced slippages and enhanced provisioning.

IREDA - A Critical Player

Of all the NBFCs operating in the renewable space, IREDA stands out.

The company is India's largest pure-play green financing NBFC and is at the forefront of promoting and supporting India's renewable energy initiatives.

The government-owned (75%) entity facilitates the financing and development of new renewable energy projects, as well as projects aimed at enhancing energy efficiency and conservation.

IREDA provide a wide range of financial products and services, covering everything from project inception to post-commissioning, for renewable energy (RE) projects and related activities like equipment manufacturing and transmission.

It provides a line of credit to other NBFCs for on-lending to RE and EEC projects. In addition, it provides loans to government entities and also provides financing schemes for RE suppliers, manufacturers and contractors.

IREDA Lending Profile - Decemeber Ending 2023

The financing prowess extends across various RE sectors including solar power, wind power, hydro power, transmission, biomass (including bagasse and industrial co-generation), waste-to-energy, ethanol and compressed biogas.

Additionally, it supports emerging RE technologies such as biofuel, green hydrogen, battery energy storage systems, fuel cells, and hybrid RE projects with tailored financial products and schemes.

Strong Financials Pave the Way

The state-owned NBCF has a robust track record of financing renewable energy projects in India. It enjoys a geographically diversified portfolio, with term loans outstanding across 23 States and five Union Territories across India, as of September 30, 2023.

All of this explains the massive growth in the business over the years.

The company has disbursed over Rs 1.6 (trillion) tn loans to renewable energy projects, accounting for over 60% of the total renewable energy capacity installed in the country.

Between 2021-2023, the loanbook has expanded at a healthy pace. For the nine months ending December 2023, the company's outstanding loan book stood at Rs 505 bn as against Rs 378 bn, an increase of 33%. Despite expanding its loanbook the company has improved its asset quality, reflected in the falling net Non-Performing Assets (NPA) numbers. The Net NPA fell from 5.6% in the financial year 2021 to 1.7% in 2023. For the nine months ending December 2023 the Net NPA stood at 1.5%.

IREDA Financial Snapshot (2021-23)

	2020-21	2021-2022	2022-2023
Net Interest Margin (%)	3.93%	3.75%	3.32%
CRAR(%)	17.12%	21.22%	18.82%
Loan Book Size or AUM (Rs bn)	2,78,539	3,39,306	4,70,755
Net NPAs	5.61%	3.12%	1.66%

Data Source: Ace Equity

But can the lender sustain this growth going forward?

One look at the non-banking finance company's past financials will tell you that it is extremely well-capitalised.

Moreover, its capital-to-risk-weighted asset ratio (CRAR) is well in line with the regulatory norms.

Under RBI prudential norms, IREDA is required to maintain a CRAR of 15%. Over the past few years, the lender has consistently exceeded and sustained these requirements. Plus, the NBFC enjoys a healthy return on equity of over 15.4% in the financial year 2023.

However, the lender is gearing up for growth in the coming years, capitalising itself. In the nine months ending December 2023, the lender raised Rs 51 bn through borrowing. Recently, IREDA declared a fresh fundraising plan of Rs 242 bn through borrowings.

IREDA Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	10.10%	17.30%	12.00%	8.10%	21.20%
Net Profit Margin (%)	12.40%	9.10%	13.00%	22.20%	24.80%
Return on Capital Employed(%)	7.70%	7.40%	8.30%	8.10%	8.20%
Return on Equity (%)	10%	8.40%	12.60%	15.30%	15.40%

Data Source: Ace Equity

Between 2019-2023, the revenues have expanded at a 5-year CAGR 13.6%. This growth can be attributed to the expanding customer base and sustained demand. Despite the impressive revenue increase, the company's net profit also rose from Rs 3.5 bn in March 2021 to Rs 8.6 bn in March 2023. This improvement was driven by a decrease in default borrowers.

The 5-year average Return on Equity and Return on Capital Employed stands at 12.4% and 8%, respectively.

Looking ahead, the company aims to extend financial assistance to various RE projects, including new and emerging RE sectors while improving its asset quality.

Presently, the stock is trading at a Price to Earnings ratio of 43.5x, a premium to its peers.

Peer Comparison

Company	5-Yr Net Profit CAGR (%)	Return on Equity (%)	P/E
IREDA	18.4	15.4	44.4
REC	20	20.4	9.3
Power Finance Corporation	19	20.3	7.1

Data Source: Equitymaster

Conclusion

IREDA isn't just another power-focused NBFC. It's a leader in financing India's clean energy revolution, boasting consistent loan book growth, a geographically diverse asset base and a reputation for high-quality assets (over 90% secured). It's delivered stable profitability in the renewable energy financing space. Furthermore, IREDA is a key partner to the government's renewable energy initiatives, actively involved in developing and implementing policies that drive growth in the sector.

However, the recent run-up in the stock price indicates that investors may have already factored in the bright outlook, possibly limiting the upside in the stock price in the near term.

Nevertheless, the government's strong focus on renewables and India's ambitious sustainability goals, make it a compelling investment play on India's clean energy future.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...