Pros and Cons of Investing in IREDA Right Now

Renewable energy has been one of the favourite themes of Indian investors over the last few years.

The massive government incentives being doled out to this industry has excited long-term investors as well as traders. Many Indian companies have established themselves as leaders in this field. And many more will do so in the future.

One of the ways to profit from a megatrend like renewable energy is to focus on the enabling ecosystem as opposed to the direct beneficiaries. Instead of investing in the big solar and wind producers, investors can consider the component makers and financiers.

In this editorial, we will examine one such company: Indian Renewable Energy Development Agency (IREDA). The stock has certainly caught the attention of Dalal Street. Let's explore the pros and cons.

Pros

#1 Good Track Record and Fundamentals

IREDA 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.

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.

Back in April 2024, the PSU company was granted the 'Navratna' status by the government of India.

IREDA's capital adequacy ratio (CAR) was 20.1% as on 31 March 2024 as compared to 18.8% last year.

This ratio helps measure the financial strength of the company or any finance company to meet their obligations using their assets and capital. A company that has a good CAR has enough capital to absorb potential losses. Thus, it has less risk of becoming insolvent and losing depositor's money.

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.

Also, the company enjoys healthy return ratios.

The return on equity (ROE) ratio for the company was stable at 14.6% during FY24 on a year on year (YoY) basis. The ROE measures the ability of a firm to generate profits from its shareholders capital.

The return on asset (ROA) ratio of the company improved to 1.95% during FY24, from 1.66% during FY23. The ROA measures how efficiently the company uses its assets to generate earnings.

The ROCE for the company improved to 9.29% during FY24, from 8.17% during FY23. The ROCE measures the ability of a company to generate profits from its total capital (shareholder capital plus debt capital) employed in the company.

The PSU also managed to bring down its non-performing assets (NPA) to 0.99% in FY24 from 1.66% in FY23. Ona an absolute basis, the NPA fell by a significant 40.52% YoY.

#2 Good Growth Outlook

The renewable energy sector is growing by leaps and bounds in India. The growth trajectory is not going to slow down anytime soon.

Among the biggest beneficiaries of this grow will be the companies that finance it, companies like IREDA. The company's financials certainly suggest that to be the case.

The company is India's largest pure play green financing non-banking finance company (NBFC). Among power financing NBFCs, the company holds the largest share of credit toward the renewable energy segment. It has certainty taken advantage of that status in the green energy boom.

In FY24, the company did great business. Its interest income rose 42.6% YoY. Its net interest income (NII) increased 29.2% YoY. It's net profit for the year increased 44.8% YoY.

IREDA achieved all-time high annual loan sanctions of Rs 373.5 billion (bn) and disbursements of Rs 250.9 bn in FY24. It also achieved an all-time high net profit of Rs 12.5 bn in FY24.

These are excellent growth numbers. The government's push for renewable energy offers a great long-term lending opportunity for companies like IREDA.

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

The company's outstanding loan book at the end of June stood at Rs 631.5 bn, marking a 33.8% rise from Rs 472.1 bn a year ago. This robust performance highlights IREDA's strong financial health and growth trajectory.

#3 Big Fund Raising Plans

In March 2024, IREDA announced a comprehensive borrowing plan, aiming to mobilise Rs 242 bn through various financial instruments.

The company successfully raised Rs 15 bn on 21 June 2024 through bond issuance. The bonds included a base issue of Rs 5 bn and a green shoe option of Rs 10 bn. It received an overwhelming response from investors, being oversubscribed 2.7 times.

The oversubscription underscores investor trust and confidence in IREDA's vision and its role in driving renewable energy growth in the country.

IREDA is likely to raise equity capital through a follow-on public offer (FPO), subject to the government's consent, according to a recent report.

The FPO could take place between November 2023 and February 2024 as the company needs an equity infusion. It's necessary to maintain IREDA's 'triple A' stable rating and support its growth trajectory.

The quantum of the FPO is likely to be between Rs 40-50 bn. A request for the FPO has been placed with the government, but the approval process will take some time.

Cons

#1 Completely Dependent on One Sector

IREDA is a pure play on the renewable energy sector. It does not lend to companies in the fossil fuel based energy sector.

This has been the big selling point for the stock because the Indian government is fully focused on renewable energy at the moment and is likely to be for the near future.

Its NBFC competitors like PFC have a much more diversified lending portfolio and thus, are not susceptible to policy changes form the government impacting one particular part of the energy sector.

Also, there is no shortage of competition in green financing. Thus, the onus is on IREDA to maintain its growth momentum. Any slipup in this regard could impact the stock negatively.

#2 High Valuations

IREDA is a stock with a high valuation in the stock market. This is because investors are pricing in high expectations of future growth.

No matter how good the fundamentals of the business may be, investors who are interested in buying a stock should always pay close attention to its valuations.

At the time of writing, the stock's price to earnings (PE) is 45 and its price to book (PB) is 7.3. After listing in November 2023, the stock has already gone up 4 times and is up 8 times from the offer price.

For more details, check out the IREDA company fact sheet and quarterly results.

Happy investing.

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...