Widely read:
Indian Renewable Energy Development Agency (IREDA), a non-banking financial institution (NBFC), will launch its initial public offering (IPO) on November 21, 2023. Here is a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.
In a nutshell
-
Quality:
IREDA reported an average three-year
ROE
of about 14 per cent. It also achieved an average net interest margin of 3.7 per cent in the last three financial years.
-
Growth:
Its assets under management (AUM) and net profit grew at 30 and 58 per cent per annum, respectively.
-
Valuation:
The stock will be valued at a
P/E
and P/B of 8.3 and 1.3 times, respectively, compared to its peers' median and average of 6.3 and 1.2 times, respectively.
- Overview: Government initiatives, supportive policies and a rising demand for sustainable development foster continuous growth in renewable energy capacity, creating favourable conditions for the company's expansion. However, the weak financial health of DISCOMs remains the biggest challenge. If such borrowers cannot manage their financial risks, non-performing assets (NPAs) could increase, adversely affecting the business.
About the company
IREDA is a government enterprise under the Ministry of New and Renewable Energy. It is a non-banking financial institution (NBFC) dedicated to promoting, developing and providing financial assistance for renewable energy projects. As of September 30, 2023, the company had 357 renewable energy borrowers across more than 10 renewable energy sectors, such as solar, wind, hydro, biomass, etc. It also operates a 50 MW solar project in Kerala, that supplies power to the Kerala State Electricity Board.
Strengths of IREDA
-
Access to diversified and cost-effective long-term borrowing sources:
The company's borrowing cost improved from 7.2 per cent in FY21 to 6.2 per cent in FY23. Its management believes IREDA's classification as a public finance institution helps it access diversified funding options.
- Security cover for loans outstanding: As of September 30, 2023, 93.4 per cent of the company's loans outstanding have security cover.
Weaknesses of IREDA
-
Heavily reliant on renewable energy:
High dependence on the Indian renewable energy sector, with 81.5 per cent of loans outstanding linked to solar energy, state utilities, wind power and hydropower, increases IREDA's vulnerability to adverse sectoral conditions. The capital intensive nature of this business also makes it more vulnerable to defaults.
-
High customer concentration:
Customer concentration remains notable, with the top 10 customers comprising 27.6 per cent of the total loans outstanding as of FY23.
- Covenant non-compliance: The company has not previously met covenants for its international lines of credit under financing documents, including with the Asian Development Bank (ADB) regarding maintaining gross non-performing loan levels.
IPO details
| Total IPO size (Rs cr) | 2150 |
| Offer for sale (Rs cr) | 860 |
| Fresh issue (Rs cr) | 1290 |
| Price band (Rs) | 30-32 |
| Subscription dates | November 21-23, 2023 |
| Purpose of issue | To meet future capital requirements and onward lending |
Post-IPO
| M-cap (Rs cr) | 8601 |
| Net worth (Rs cr) | 7871 |
| Promoter holding (%) | 75 |
| Price/earnings ratio (P/E) | 8.3 |
| Price/book ratio (P/B) | 1.3 |
Financial history
| Key financials | 2Y CAGR (%) | TTM | FY23 | FY22 | FY21 |
|---|---|---|---|---|---|
| NII (Rs cr) | 14 | 1408 | 1285 | 1126 | 994 |
| PAT (Rs cr) | 58 | 1034 | 865 | 634 | 346 |
| Advances (Rs cr) | 30 | 47514 | 47076 | 33931 | 27854 |
| Deposits (Rs cr) | 29 | 46713 | 40165 | 27613 | 24000 |
| Net worth (Rs cr) | 41 | 6581 | 5935 | 5268 | 2996 |
|
NII is net interest income
PAT is profit after taxes TTM is trailing twelve months |
|||||
Key ratios
| Ratios | 3Y average (%) | TTM | FY23 | FY22 | FY21 |
|---|---|---|---|---|---|
| ROE (%) | 14 | 17 | 15 | 15 | 13 |
| ROA (%) | 2 | 2 | 2 | 2 | 1 |
| NIM (%) | 4 | 4 | 3 | 4 | 4 |
| GNPA (%) | 6 | 3 | 3 | 5 | 9 |
|
ROE is return on equity ROA is return on assets NIM is net interest margin GNPA is gross non-performing assets TTM is trailing twelve months |
|||||
Risk report
Company and business
-
Is IREDA free from regulatory penalties?
Yes, the management is free from regulatory penalties. However, in the ordinary course of business, the company's borrowers have initiated 35 proceedings in various High Courts against it. The aggregate amount involved in these proceedings is Rs 84 crore. Additionally, the Deputy Director of the Enforcement Directorate filed an appeal dated November 25, 2020, before the Appellate Tribunal of Prevention of Money Laundering. -
Does the company adequately provide for its non-performing assets (NPAs)? Specifically, is the provision-to-gross NPAs ratio more than 50 per cent?
No, its provision coverage ratio stood at 48.1 per cent as of September 30, 2023. -
Do the top five managers have stocks as a significant part of their compensation (more than 50 per cent)?
No, the company does not have any employee stock option scheme.
Financial strength and stability
-
Does IREDA have a fresh slippage-to-total advances ratio of less than 0.25 per cent?
Yes, the ratio stood at 0.02 per cent for the year ended FY23 and 0.1 per cent for the six months ended September 30, 2023. -
Did the company generate a current return on equity (ROE) of more than 12 per cent and a return on assets (ROA) of more than 1 per cent?
Yes, the company reported an ROE and ROA of 15.4 and 2 per cent, respectively, in FY23. -
Has the IREDA increased its loan book by 20 per cent annually over the last three years?
Yes, the company increased its loan book by 30 per cent annually between FY21 and FY23. - Has the company increased its net interest income (NII) by 20 per cent annually over the last three years? No, it achieved an annualised growth rate of 14 per cent in net interest income between FY21 and FY23.
-
Is there a direct relationship between the loan book value increase and the net interest income (NII)?
Yes, higher advances have translated into higher net interest income. However, the increase in NII is less than that of advances. -
Is the company's capital adequacy ratio more than 15 per cent?
Yes, it reported a capital adequacy ratio of 20.9 per cent as of September 30, 2023. -
Can the company run its business without relying on any external funding in the next three years?
Yes, its capital adequacy ratio stood at 20.9 per cent as of September 30, 2023. The financial strength, coupled with the IPO proceeds, would ensure the sustainability of business operations without external help. -
Did the company generate an average net interest margin (NIM) of over 3 per cent in the last two years?
Yes, its average three-year net interest margin (NIM) stood at 3.7 per cent. - Is the company's average gross NPA ratio over the last three years less than 1 per cent and the average net NPA ratio less than 0.5 per cent? No, it reported an average gross NPA of 5.7 per cent and an average net NPA of 3.5 per cent in the last three years.
-
Does the company have a cost-to-income ratio of less than 50 per cent?
Yes, it reported a cost-to-income ratio of 67.3 per cent in FY23.
Growth and business
-
Will IREDA be able to scale up its business?
Yes, government initiatives and a growing focus on sustainable development drive an increase in renewable energy capacity and demand, providing opportunities for the company to scale up its business. -
Does the IREDA have a loan book of more than Rs 1,00,000 crore?
No, it reported an AUM of Rs 47,514 crore as of September 30, 2023. -
Does the company have a recognisable brand truly valued by its customers?
No, many banks and NBFCs operate on a larger scale, have better brand recall, and offer competitive rates to customers. -
Does IREDA have a credible moat?
No, there are several other players that offer similar services. -
Is the level of competition faced by the company relatively low?
No, India's financial and banking sector is highly competitive with both public and private players.
Valuations
-
Is IREDA's price-to-earnings ratio lower than its peers' median level?
No, it will trade at a price-to-earnings ratio of 8.3, higher than the median of 6.3 for its peers. -
Is the company's price-to-book ratio lower than its peers' average level?
No, it will trade at a price-to-book ratio of 1.3, higher than its peers' median level of 1.2.
Disclaimer: This is not a stock recommendation. Do your due diligence before investing.
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