Renewables financier Ireda's high valuation may limit further stock upside

State-owned Indian Renewable Energy Development Agency’s (Ireda’s) chairman and managing director Pradip Kumar Das has announced that the company has requested the government to allow it to carry out a follow-on public offer (FPO) as it will need further equity infusion to maintain the pace of growth.

The FPO would aim to raise between Rs 4,000 crore and Rs 5,000 crore.

Ireda, which provides funding assistance and other services to renewable energy and energy efficiency/conservation projects and is 75 per cent owned by the government of India, has requested the Union Finance Ministry to be included under Section 54EC of the Income Tax Act, which will help reduce borrowing costs.

On the business front, Ireda’s good loan growth and pipeline provides visibility. It has managed funding costs well, which can be seen in the stable cost of funds. But as the leverage increases, net interest margin (NIM) could come under pressure. The asset quality is good.

In Q4FY24, the net interest income (NII; interest earned minus interest expended) was Rs 481 crore, up 35 per cent year-on-year (Y-o-Y) and 7.5 per cent quarter-on-quarter (Q-o-Q), driven by loan growth of 27 per cent Y-o-Y and 18 per cent Q-o-Q. While, other operating income was Rs 60 crore, up over 49 per cent Y-o-Y and up 39.7 per cent Q-o-Q.

The NIM can be calculated as a margin of 3.43 per cent.

However, calculated spread declined both Y-o-Y and Q-o-Q by 35bps and 18bps respectively despite Y-o-Y decline in leverage. The yield on loans during the quarter declined whereas cost of funds remained stable leading to a sequential decline in NIM.

The calculated yield on assets declined to 9.65 per cent (down 22bps Q-o-Q) whereas cost of funds was stable sequentially at 7.42 per cent.

Disbursement was good at Rs 12,900 crore, up 14 per cent Y-o-Y and up 116 per cent Q-o-Q translating into strong loan growth.

Sanctions gained momentum during the quarter with incremental sanctions at Rs 23,400 crore (up 98 per cent Y-o-Y and 154 per cent Q-o-Q). The total sanction during FY24 was Rs 37,300 crore Vs Rs 32,500 crore in FY23. Healthy sanction pipeline indicates momentum going forward.

The pre-provision profit was Rs 480 crore, up 45 per cent Y-o-Y and up 15.4 per cent Q-o-Q. The asset quality showed improvement sequentially. The provision during Q4 was only Rs 9 crore, which was 0.1 per cent of the loan book.

The tax rate was relatively high at 30 per cent vs 13 per cent in Q3, but the full year tax rate was in line at 25.7 per cent. Consequently, PAT was Rs 340 crore, up 33 per cent Y-o-Y and 0.6 per cent Q-o-Q. For FY24, PAT was Rs 1,252 crore, an increase of 45 per cent Y-o-Y.

The gross non-performing asset (NPA) and net NPA ratios improved to 2.4 per cent (down 55bps) and 0.9 per cent (down 52bps) respectively on a Q-o-Q basis.

Ireda may enjoy strong loan growth at a CAGR of 25 per cent during FY24-26 on rising demand for renewable energy. But the earnings growth is not expected to match the loan growth due to pressure on margins. Higher exposure to the private sector and higher proportion of vulnerable portfolio imply rising credit costs in the medium term.

If Ireda’s earnings growth sustains at 18-20 per cent in FY25 and FY26, this will translate into return on equity of 16.1 per cent. While loan growth is high, the return ratios are moderate and return on assets (ROA) may decline to 2.2 per cent in FY25 and 2.1 per cent in FY26 from 2.3 per cent in FY24. The Price/Book Value (P/BV) ratio of above 3x on expected FY25 book value seems unsustainable.

A new equity infusion and lower cost of funds through 54 EC could improve the situation in terms of leverage and NIM. But fair valuation of below P/BV of 3x on FY25 estimated BV may see the stock correct from current elevated levels.

Moreover, there are very few analysts that track the stock.

According to Bloomberg, there are two analysts who have a rating on the stock. A sell rating in early May with a price target of Rs 110, and a buy rating in later June with target price of Rs 250. Even if one were to consider the latter, the upside is limited given Thursday’s closing price of Rs 220.