IREDA IPO: Should you subscribe?

The initial public offering of IREDA (Indian Renewable Energy Development Agency), the renewables-based NBFC, is open for subscription during November 21-23. Currently fully owned by the government, post issue government holding in the company will reduce to 75 per cent.

At the upper end of the price band, the total offer is around ₹2,150 crore, which comprises fresh issue of ₹1,290 crore and offer for sale of ₹860 crore. The net proceeds from the fresh issue shall be utilised towards augmenting the company’s capital base to meet future capital requirements and onward lending.

At the upper end of the price band, the stock is priced at a trailing P/B of 1 time as against that of its peers PFC and REC, which have trailing P/B of around 1.54 times and 1.24 times respectively. Long-term investors with high risk appetite can subscribe to the issue. While there are risks, given excessive dependency on the power sector which can face challenges every once in a while, the attractive valuation and growth prospects in the Indian renewables space offer margin of safety.

Business

Conferred with Miniratna status, IREDA is an NBFC engaged in promoting, developing and financing new and renewable energy (RE) projects, and energy efficiency and conservation projects. It provides a comprehensive range of financial products and related services. These services are provided from project conceptualisation to post-commissioning, for RE projects and other value chain activities, (split) such as equipment manufacturing and transmission. The company is notified as a Public Financial Institution (PFI) and is registered with the Reserve Bank of India as a Systemically Important Non-Deposit-taking Non-Banking Finance Company (a NBFC-ND-SI), with Infrastructure Finance Company (IFC) status.

IREDA’s portfolio mix comprises 77 per cent of loans advanced to private sector and the remaining to public sector entities. This is different from PSU peers REC and PFC, which have over 90 per cent of loans consisting of advances to public sector. ReNew Power, SJVN, Continuum MP Windfarm Development Private Energy and Acme Cleantech Solutions Private Limited have been its customers. Solar (30 per cent) and wind (20 per cent) projects contribute nearly 50 per cent of its loan book with other major contributors being state power utilities (19 per cent), hydro power projects (11 per cent) and renewables-related manufacturing.

Of the company’s total assets, around 62 per cent comprises generation-based assets, which includes 5-10 per cent of merchant-based capacity and the rest backed by long-term power purchase agreements (PPA).

Further, of generation projects, around 80 per cent are already commissioned and generating revenue. Already commissioned projects backed by long term PPAs provide comfort in terms of quality of lending. Consequently, the company doesn’t need high provision coverage ratio and can keep the same at around 48 per cent, as per management.

The company’s borrowing sources comprise around 46 per cent of rupee loans from banks or financial institutions such as HDFC Bank, SBI, Bank of India and PNB; 25 per cent of foreign currency borrowings from the international funding sources include loans from the World Bank, the Asian Development Bank, KfW, Japan International Cooperation Agency, European Investment Bank and Agence Francaise de Developpement. Other borrowing sources include domestic bonds, tax-free bonds, subordinate bonds and National Clean Energy Fund.

Financials

The company has a portfolio of term loans amounting to ₹47,075.5 crore as of FY23, reflecting a CAGR of around 30 per cent since FY21, which is higher than that of its peers REC and PFC. Further, the loans disbursed during H1FY24 amounted to around ₹6,273.25 crore, implying YoY growth of around 56 per cent. The company has been able to grow its net interest income at around 48 per cent on a YoY basis during H1FY24.

Its net interest margin reduced from around 3.58 per cent to 3.36 per cent (annualised) while the same was 3.75 per cent and 3.32 per cent during FY22 and FY23 respectively, which is similar to that of PFC and REC. The company has been able to reduce its NPA from 5.61 per cent in FY21 to around 1.66 per cent in FY23.

Growth triggers

The Indian renewable space is poised for growth in the near term as the government targets non-fossil fue capacity to the tune of around 500 GW by 2030 from the current level of 183 GW. As per the management, till 2030, nearly 30 lakh crore of investment is about to be made in the renewable energy space. While considering debt:equity mix of 75:25, ₹24 lakh crore shall be financed through debt. According to management, 50 per cent of the total debt required is estimated to be catered by NBFCs such as IREDA, REC, PFC and others. As per the management, this provides substantial visibility for the firm in the long term as the company has been in the business for 36 years, has 31 per cent share in RE financing market and has understanding of the nuances of the sector.

The company being a Public Finance Institution with a focus on RE sector borrowers, by nature, faces concentration risk. Its financials rely typically on the growth of the Indian RE sector. While there have been growth triggers, the projects it finances carry certain inherent risks — such as counterparty risk in payment and signing PPAs, discom financials, high dependency on imports for modules, increase in capital costs due to material cost escalation, intermittent availability of solar and wind energy and cost overruns due to delay in project execution. IREDA attempts to mitigate such risks by maintaining a secured asset base as 93 per cent of its loan assets are backed by security cover.

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