IREDA, the largest pure-play green energy financer in India, focuses on lending to the renewable energysector.According to an ET analysis, with a loan book size of Rs 47,515 crore, the company has been able to improve its asset quality over the past three years.IREDA operates in a high-growth sector that is a priority for the government. According to the analysis, with these factors in mind and also the reasonable valuation, IREDA IPO should be subscribed to by long-term investors.
IREDA’s business: IREDA, established in 1987, is a non-banking financial company (NBFC) that provides financing for renewable energy projects, energy efficiency initiatives, equipment manufacturing, and transmission. The company’s loan book has been growing steadily, reaching Rs 47,514.5 crore as of September 2023. The private sector constitutes 77% of the loan book, with secured loans making up 93%.
IREDA peer comparison
IREDA has played a significant role in financing renewable energy projects, accounting for 31% of the total credit given to such projects as of March 2023. It is second only to the state-owned Power Finance Corporation (PFC), which holds a 32% share. REC, an arm of PFC, has a 19% share in renewable energy financing.
IREDA provides financing for various renewable energy initiatives, including solar, wind, hydro, biomass, ethanol, and green mobility. The company also supports emerging technologies such as green hydrogen, battery storage systems, and hybrid renewable energy.
IREDA plans to gradually increase the financing of new renewable energy technology projects, which offer a superior net interest margin (NIM) of 4-5% compared to the traditional renewable energy projects that have a NIM of 2.0-2.5%.
IREDA financials: In terms of financial performance, IREDA has shown positive growth. Its total income increased by 14.5% annually between FY21 and FY23, reaching Rs 3,483 crore. Net profit also saw a significant increase of 58% to Rs 864.6 crore. The return on assets (RoA) improved from 1.2% to 2%, while gross non-performing assets (GNPA) decreased from 8.8% to 3.2% during the same period.
IREDA’s cost of funds, at 6.2% in FY23, is lower compared to 7.3% for REC and 7.5% for PFC.
Opportunity: The government’s target of achieving 500 gigawatts (GW) of non-fossil-based energy by 2030 presents a significant opportunity for IREDA. With 22 GW already financed by the company, the total investment required for this target is estimated to be Rs 24 lakh crore. Assuming a 50% share for non-banking financial companies (NBFCs), the opportunity for lenders including IREDA is worth Rs 12 lakh crore.
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Risks: However, intense competition from larger peers such as PFC and REC could limit the extent of net interest margin expansion for IREDA.
IREDA Valuation: In terms of valuation, IREDA demands a price-book (P/B) multiple of up to 1.1, which is lower than the P/B of around 1.4 for larger power sector financers like PFC and REC. It’s important to note that while PFC and REC distribute dividends, IREDA has not declared a dividend in the past three years. IREDA is likely to reinvest its profits into the business to support the faster growth of the renewable energy sector in the medium term.