IREDA shares correct after gaining over 100% since listing; what should investors do?
The brokerage has a ‘sell’ call on the stock with a target price of ₹80, implying a downside of over 23 percent from its current market price of ₹104.40, as of December 4.
“IREDA to see strong loan growth over FY23-26 on rising demand for renewable energy in the country. But the earnings growth is not expected to match the loan growth due to pressure on margins and normalisation of credit costs (which was negative in H1FY24). While loan growth is high, return ratios are weak and there is higher exposure to the private segment – which undermines conviction. We believe the best is already priced into the stock. We initiate coverage with a SELL rating,” explained the brokerage.
Stock price trend
IREDA was listed on the Indian exchanges on November 29, 2023, at ₹60 apiece, an 87.5 percent premium over the issue price of ₹32. It continued the same upward trajectory for the next 11 sessions, achieving a record high of ₹123.30 apiece on December 14, 2023, surging 105.6 percent from its listing price and 285.5 percent from its IPO price.
However, after hitting its record high, the stock consolidated a bit and has shed a little over 15 percent since then.
Just in December last year, the stock jumped 57.4 percent and it has added 2.5 percent in the 5 sessions of January 2024.
The IPO had garnered significant demand across investor segments, experiencing an impressive subscription rate of 38.8 times during the three-day bidding window from November 21 to 23.
The remarkable rally post listing caught the attention of the National Stock Exchange (NSE), prompting it to seek clarification from the company on December 14. The company on the same day replied that it had no positive information or any other material information to disclose that could impact the trading activity or volume behaviour.
About the firm
IREDA (Indian Renewable Energy Development Agency) is an NBFC established in 1987 to provide innovative financing in RE and energy efficiency, conservation, and environmental technologies. It is a wholly-owned Government of India (“GoI”) enterprise under the administrative control of the Ministry of New and Renewable Energy (the “MNRE”).
Among power financing NBFCs, the company has the largest share of credit towards the RE sector other than Power Finance Corporation, which is also present in sectors such as infrastructure, roads, mining, and others, while the company is completely focused on the RE sector.
Rating rationale
The brokerage believes that while the accelerated loan growth will be driven by the non-conventional segment, spreads are under constant pressure.
“Indian Renewable Energy Development Agency Limited (IREDA) is the pure-play green financing NBFC in India, well placed to capitalize on the rapid growth in the RE sector. It is the implementation agency for several prominent MNRE schemes and policies. Strong domain knowledge gained over the years and innovative solutions enable it to cater to more than 10 RE sectors such as solar, wind, hydro, biomass, co-generation, EV, waste-to-energy, EEC, manufacturing, and ethanol. We expect its loan book CAGR at +30 percent over FY23-26, making it one of the fastest growing NBFCs in the system,” said the brokerage.
However, it added that the rising cost of funds and increasing growth in low-yielding solar and wind segments will keep its spreads under pressure. These segments have low gestation periods, so projects become operational quite quickly, in just 9-15 months, and after commissioning, risk factors come down, leading to pressure on yields.
The brokerage has factored NIMs declining 56 bps in FY24 on a calculated basis to 2.57 percent, remaining range-bound thereafter.
It further pointed out that asset quality is improving, but credit costs are to start normalising from a low of FY24.
Asset quality has seen improvement over the last few years due to better recovery and containment of fresh additions. IREDA saw high stage-3 assets (at 10 percent) in FY20, marked by high stress in biomass, hydro, and wind segments. With a large part of this stress behind us now, asset quality should improve in the near term, predicted the brokerage.
But, as a result of high stress in the past, IREDA made accelerated provisions towards stage-3 and stage-2 assets, some of which it reversed in H1FY24. This will translate into negative credit costs in FY24, which will move to normalised levels from there. A higher share of the private sector exposure and elevated proportion of vulnerable pool are potential risks in the portfolio, it cautioned.
Key risks
Spread risk: Solar and wind segments will be major drivers for loan growth ahead. Given the portfolio concentration towards renewable projects (which have a short gestation period), these projects can be subjected to re-pricing risks after commissioning, leading to further pressure on spreads and margins, said the brokerage.
Asset-quality risk: A higher share of private sector exposure and a higher proportion of vulnerable pool are potential risks in the portfolio, it warned.
Outlook and valuation
As per the brokerage, IREDA is likely to see strong loan growth at a CAGR of 32 percent over FY23-26 on rising demand for renewable energy in the country. But the earnings growth is not expected to match the loan growth due to pressure on margins and normalisation of credit costs (which was negative in H1FY24). Higher exposure to the private sector and a high proportion of the vulnerable portfolio do not provide confidence for low credit costs in the medium term, it added.
It expects IREDA’s earnings growth of 28 percent/25 percent/17 percent in FY24/25/26, translating into a return on equity (RoE) of 15.5 percent/15.3 percent/15.4 percent.
“While loan growth is high, return ratios are weak and there is higher exposure to the private segment – which undermines conviction. We believe the best is already priced into the stock. We initiate coverage with a SELL rating and a target of ₹80, valuing the company at 2.1x FY26 BVPS of ₹38,” said the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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Published: 05 Jan 2024, 12:50 PM IST
