IREDA vs PFC: Which Power Finance Stock is Better for 2024?

After winning the state elections in Madhya Pradesh, Rajasthan, and Chhattisgarh, there's a likelihood of a BJP-led alliance sweeping the 2024 general elections.

This prospect has also increased the probability of the current government continuing to achieve its budgeted capital expenditure of Rs 10 trillion (tn) in the financial year (FY) 2023-24.

There is an approval of Rs 974 billion (bn), and eligible states have received Rs 590 bn.

In the last 9 years, the capital expenditure budget has increased at a compounded annual growth rate (CAGR) of 18%.

In the coming years, with a stable government, capital expenditure is likely to enhance even further.

Moreover, India's target to become net carbon zero by 2070 ensures that the government will likely allocate a decent amount to the power sector.

The FY 2023-24 Union Budget allocated Rs 73.3 bn for solar energy, a jump of 48% from its revised estimates.

It includes grid, off-grid, and Pradhan Mantri Kisan Urja Suraksha Evam Utthaan Mahabhiyan (PM-KUSUM) projects.

From the allocated budget, Rs 49.7 bn is towards interactive-grid, Rs 20 bn for PM-KUSUM, and Rs 3.6 bn for off-grid solar energy projects.

Wind energy projects bagged a total allocation of Rs 12.1 bn, a drop of 14% from its revised estimates.

According to the FY 2023-24 expenditure budget document, Rs 2.8 bn has been allocated to the national green hydrogen mission.

The demand for power in India is also likely to grow approximately 1.6 times in the next 4 years.

As of November 2023, India's power sector has an installed capacity of 426 gigawatts (GW) and is expected to grow to 692 gigawatts by 2028. This translates to a compounded annual growth rate (CAGR) of 12.9%.

All of this indicates that companies with a government push might also announce fresh capital expenditures, leading them to raise funds.

So, IREDA or PFC, which power finance company is the better choice for investment in 2024?

In this article, we will compare both these companies and find out.

Business Overview

# IREDA

IREDA is a Mini Ratna (Category - I) Government of India enterprise. This company falls under the administrative control of the Ministry of New and Renewable Energy (MNRE).

The government company was established as a non-banking financial company (NBFC) in 1987. It promotes, develops, and extends financial assistance to set up new and renewable energy and energy efficiency or conservation projects.

IREDA's mission is to become a pioneering, participant friendly, and competitive institution for financing and promoting self-sustaining investment in energy generation from renewable sources, energy efficiency, and environmental technologies for sustainable development.

# PFC

PFC was incorporated on 16th July 1986 and is a Maharatna (Schedule-A) Government of India enterprise, established as an NBFC.

This company is under the administrative control of the Ministry of Power.

The company offers rupee-term loans, short-term loans, equipment lease financing, transitional financing, etc. catering to various power projects across generation, transmission, and distribution segments.

The company has also ventured into the infrastructure and logistics segment, focusing on e-vehicle fleets, charging infrastructure, roads, ports, metro rail, smart cities, and other large infrastructure projects.

Comparative Analysis of PFC & IREDA

Particulars	IREDA	PFC
Market Cap (in Rs Billion)*	292.97	1,245.62
Loan Book (in Rs Trillion)^	0.47	9.24
% of renewables (incl. hydro) in asset mix ^	61%	11%

* As on 20th December 2023 | ^As on 30th September 2023

With a market capitalization of Rs 1,245.6 bn, PFC is the biggest power finance company among the two. The market capitalization of IREDA is Rs 292.9 bn.

Although PFC has the highest loan book, IREDA wins when it comes to the renewable contribution in overall asset mix. PFC's loan book is 9 times the loan book of IRDEA.

Conventional energy generation contributes 42% of the PFC's asset mix. However, renewable energy is the future of the power sector and IREDA has an edge over PFC.

However, PFC is also catching up as it has grown its renewables portfolio at 20% CAGR in the last 5 years (FY 2018-19 to FY 2022-23).

IREDA vs PFC: Which Stock is Better?

To understand which power finance stock among the two outshines, we analysed them on various parameters.

Both these stocks were put through a test based on their profitability, operational efficiency, financial efficiency, dividends, and valuations.

For profitability we took the 5-year median, while for operational efficiency and financial efficiency we took the 3-year median of all the parameters.

Profitability

Net Interest Income (in Rs Million)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
IREDA	8,367	9,081	10,845	12,726	13,935	10.74%
PFC	191,724	219,848	270,060	319,287	307,241	9.89%
Pre-Provisioning Operating Profit (in Rs Million)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
IREDA	16,164	17,231	21,625	24,574	32,592	15.06%
PFC	525,030	549,735	646,134	682,257	737,592	7.04%
Provisions and Contingencies (in Rs Million)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
IREDA	249	0	0	130	80	-20.31%
PFC	0	0	0	542	1,695	601.15%
PAT (in Rs Million)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
IREDA	2,499	2,146	3,464	6,335	8,646	28.18%
PFC	126,403	94,773	157,162	187,682	211,786	10.87%

Data Source: Ace Equity

As can be seen in the table above, IREDA performs well when it comes to profitability. In terms of net interest income both the companies are doing well with IREDA running slightly ahead of PFC.

However, in terms of pre-provisioning operating profit, IREDA takes the lead as it performs way better than PFC. This is due to its efficient cost management and diversified asset mix.

If we look at provisions, then PFC lags behind IREDA with its increased provisions. Provisions means the amount of loans that are less likely to be recovered.

The provisions of IREDA were reduced by 38.5% compared to last year and 20.3% in the last 5 years.

However, the provisions of PFC increased by 212.4% compared to last year, while increased by 601.2% in the last 5 years.

Lower provisions have led IREDA to clock better profit after tax (PAT) growth compared to PFC.

Operational Efficiency

Net Interest Margin (in Rs Million)	Mar-21	Mar-22	Mar-23	3-Year CAGR
IREDA	3.93%	3.75%	3.32%	-5.47%
PFC	3.68%	3.79%	3.27%	-3.86%
Cost to Income Ratio	Mar-21	Mar-22	Mar-23	3-Year CAGR
IREDA	78.57%	70.99%	67.29%	-5.03%
PFC	72.27%	69.34%	65.87%	-3.04%
Gross NPA	Mar-21	Mar-22	Mar-23	3-Year CAGR
IREDA	8.77%	5.21%	3.21%	-28.47%
PFC	5.29%	5.02%	3.66%	-11.55%
Net NPA	Mar-21	Mar-22	Mar-23	3-Year CAGR
IREDA	5.61%	3.12%	1.66%	-33.36%
PFC	1.97%	1.66%	1.06%	-18.66%
Slippage Ratio	Mar-21	Mar-22	Mar-23	3-Year CAGR
IREDA	2.09%	0.10%	0.02%	-78.77%
PFC	0.03%	0.52%	0.00%	-100.00%

Data Source: Red Herring Prospectus of IREDA

The operational efficiency of both the companies looks similar, but the pace at which they are achieving it is different.

Although the net interest margin (NIM) of IREDA is higher than PFC, its rate of decline in the past 3 years is also higher than PFC.

The cost to income ratio (CIR) of IREDA is higher than PFC. However, the rate at which it is reducing its CIR is commendable.

IREDA has reduced its CIR by 11.3% in the past 3 years, while PFC only managed to reduce 6.4% in the same period. Having said that, both the companies seem to be committed to reducing costs.

The asset quality of both the companies is similar. In fact, both the companies are able to lower their gross non-performing assets (GNPA) and net non performing assets (NNPA).

However, IREDA was able to reduce it at a higher pace than PFC. Having said that, the asset quality of both the companies is phenomenal. Even the slippage ratio of both the companies is almost 0%.

Financial Efficiency

ROA	Mar-21	Mar-22	Mar-23	3-Year CAGR
IREDA	1.20%	1.89%	1.98%	18.17%
PFC	2.14%	2.40%	2.51%	5.46%
ROE	Mar-21	Mar-22	Mar-23	3-Year CAGR
IREDA	12.56%	15.33%	15.44%	7.12%
PFC	23.96%	21.08%	20.34%	-5.31%
CRAR	Mar-21	Mar-22	Mar-23	3-Year CAGR
IREDA	17.12%	21.22%	18.82%	3.21%
PFC	18.83%	23.48%	24.37%	8.98%

Data Source: Red Herring Prospectus of IREDA

Both the companies have done quite well when it comes to financial efficiency. However, this time around PFC takes the lead.

Return on assets (ROA) of PFC is better than IREDA, but the pace at which IREDA's ROA has jumped is noteworthy. This shows that, PFC earns better returns on per rupee in loans.

In terms of return on equity (ROE), PFC outpaces IREDA. However, the ROE of PFC is consistently declining, while IREDA is able to consistently grow it.

Capital to risk-weighted assets ratio (CRAR) of both the companies is good and is above the minimum requirement of 15% as set by the Reserve Bank of India (RBI).

Having said that, PFC takes the lead as it has higher CRAR than IREDA. Moreover, in the past 3 years PFC was able to increase it substantially. Nevertheless, with better CRAR, both the companies are well capitalised.

Dividends

Considering dividends are equally important along with profitability, operational efficiency, and financial efficiency.

When it comes to dividends PFC outpaces IREDA. Although IREDA has a history of paying dividends, for the past 3 years it has not paid any dividend.

However, according to the guidelines on capital restructuring of central public sector enterprises (CPSE), all CPSEs are required to pay a minimum annual dividend of 30% of PAT or 5% of their net worth, whichever is higher, unless an exemption is provided.

IREDA has received an exemption from the Ministry of Finance, Department of Investment & Public Asset Management with regards to payment of dividend for financial year 2021, 2022, 2023, and 2024.

Except for FY 2018-19, PFC has been consistently paying dividends since 2007. The median dividend per share of PFC is Rs 7.9. In fact, the average dividend per share in the last 5 years is Rs 8.05.

So far in FY 2023-24 PFC has declared a dividend of Rs 9.0, higher than what it declared in the previous financial year.

Now if we look at dividend yield, it has improved since FY 2017-18, despite offering dividend per share closer to its historical median.

In fact, the average dividend yield prior to FY 2017-18 was 3.53%, whereas post that was 7.93%.

PFC's Dividend Payout Ratio (%)

Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	4-Year CAGR
0.00%	35.22%	22.47%	22.61%	22.02%	-11.08%

Data Source: Ace Equity

Although PFC is a dividend paying company, its dividend payout ratio has reduced from 35.22% in FY 2019-20 to 22.02% in FY 2022-23. This is a fall of nearly 11%.

The dividend payout ratio is a good metric to understand how much percentage of the profits will be distributed as dividends.

Valuations

Buying stocks at a good deal always makes sense as it reduces your overall downfall risk due to value re-rating.

When it comes to valuing a finance company, price-to-book (P/B) ratio is one of the best valuation metrics to be relied upon.

Of course, you should not make decisions simply based on this metric. You also look at other factors that we discussed in this article.

Valuations	IREDA	PFC	Industry
P/B	3.78	1.37	1.78

Data Source: Value Research, Screener
Data as of 22nd December 2023

In terms of valuations, PFC seems to be at a better position compared to IREDA. The price to book value (P/B) of PFC is lower than IREDA and industry.

Therefore, we can say that PFC is available at relatively better valuations. IREDA, on the other hand, seems to be pricey as its P/B is higher than PFC as well as industry.

Which Stock is Better?

Fundamentally speaking, both the companies are doing well. In terms of profitability IREDA scores over PFC. However, in terms of operational and financial efficiency PFC takes the lead.

Among the two, PFC has been consistently paying dividends since FY 2007-08, with FY 2018-19 being an exception. IREDA, on the flipside, does have a dividend paying history, but has not paid any dividends since FY 2020-21.

IREDA has identified 7 strategic segments where it is likely to expand. This is in alignment with the Government of India's focus. These key areas include:

• Green Hydrogen and Derivatives (Including Manufacturing)
• Pumped Hydro Storage Power Plants
• Battery Storage Value Chain (Including Manufacturing, Storage, Recycling)
• Offshore Wind
• Green Energy Corridor
• Rooftop Solar Power
• Green Mobility Value Chain (Fuel Cells, Charging Infrastructure)

Moreover, IREDA is also focused on optimising borrowing costs. This in turn will enhance its competitiveness and profitability. To achieve non-linear growth, the company is streamlining its operating model.

Also, it is likely to have a focus on the environment and social management system. With the government's target to achieve 500 GW non-fossil energy capacity by 2030 and achieve net zero carbon by 2070, IREDA has a lot of scope to grow in this space.

PFC, on the other hand, has substantially reduced its conventional generation lending from 62% in FY19 to 42% in FY23.

Moreover, its renewable energy generation portfolio jumped at a CAGR of 14% from FY19 to FY23. As per the PFC's analyst call, the company expects to clock the similar growth in its loan book as it did in FY23.

Having said that, its growth will be majorly driven by lending to traditional solar and wind projects and lending to distribution companies under the government scheme.

Moving ahead, PFC is likely to be more aggressive on the renewables segment as renewables is the future of the power sector.

So there you go... a detailed competitive analysis of PFC vs IREDA. We recently also covered another comparison article between Tata Power vs Adani Power.

Do let us know in the comments section below which companies you'd like us to compare next.

We hope this article shed some valuable insights and you got a lot of takeaways.

Still Confused Which is Better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!

IREDA vs PFC

You can also compare both the companies with their peers.

• IREDA vs IRFC
• PFC vs IFCI

Check out the PFC factsheet and IREDA factsheet for a detailed analysis.

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...