Indian Renewable Energy Development Agency Ltd IPO

About the company:

Indian Renewable Energy Development Agency Ltd (IREDA) was incorporated in the year 1987 and is a fully government owned company (100% government owned). IREDA is classified as a Mini Ratna (Category - I) government enterprise and falls under the Ministry of New and Renewable Energy (MNRE). It is a financial institution into the business of giving loans for renewable energy products in India. Its outstanding loan book stands at over Rs47,200 crore as of June 2023. Out of its overall loan book portfolio, 30.0% is accounted for by solar energy projects, 23.0% by wind energy projects, 19.2% by loans to state utilities, 11.8% to small hydro projects,  8.2% to renewable manufacturing and 5.7% to biomass and cogeneration. They have a geographically diversified portfolio, with Term Loans Outstanding across 23 States and five Union Territories across India, as of September 30, 2023.

The Objectives of the Fresh Issue:

The fresh issue portion of Indian Renewable Energy Development Agency Ltd (IREDA) IPO comprises the issue of 40,31,64,706 shares (4,031.65 lakh shares approximately), which at the upper price band of INR 32 per share will translate into fresh issue size of INR 1,290.13 crore.
The offer for sale (OFS) portion of the IPO of Indian Renewable Energy Development Agency Ltd (IREDA) comprises the sale of 26,87,76,471 shares (2,687.76 lakh shares), which at the upper price band of INR 32 per share will translate into an offer for sale (OFS) size of INR 860.08 crore.

Key Strengths:

- Proxy for Green Energy Growth in India
They are the largest pure-play green financing NBFC in India with loan assets of INR 470.7 billion as of March 31, 2023 (Source: CARE Report), where as per the RBI, “green finance” means lending to and/or investing in the activities/projects that contributes to climate risk mitigation, climate adaptation and resilience, and other climate related or environmental objectives - including biodiversity management and nature-based solutions. 

- Track Record of Growth and Diverse Geographic Presence
They have an established track record of consistent growth in their loan book and stable profitability in the RE financing space in India. As on March 31, 2023, their Term Loans Outstanding stood at INR 470,755.21 million, compared to INR 278,539.21 million as on March 31, 2021, increasing at a CAGR of 30%, and as of September 30, 2022 and September 30, 2023, our Term Loans Outstanding were INR 337,833.59 million and INR 475,144.83 million, respectively. Along with this growth, they have maintained a diversified asset book in terms of geography spilt.

- Strategic role in Government of India initiatives in the Renewable Energy sector
They are a wholly owned GoI enterprise under the administrative control of the MNRE. Since their inception, they have been closely involved in the development and implementation of various policies and schemes for structural and procedural reform in the RE sector.

- Established and trusted brand name operating in a rapidly expanding sector
With the announcement of 500 GW non-fossil fuel-based capacity installation by 2030 and net-zero emissions by 2070, India has set itself on one of the most accelerated energy transition trajectories in the world. (Source: CARE Report) Their position as the largest pure-play green financing NBFC in India places them among select players who are well placed to capitalise on the rapid growth in the RE sector.

Key Risks:

Their business and financial performance could suffer if they are unable to effectively manage the quality of their growing asset portfolio and control the level of their non-performing assets ("NPAs”).

Volatility in interest rates could adversely affect their business, hedging instruments, net interest income and net interest margin, which in turn would adversely affect their business, results of operations and financial condition.

They may be unable to secure borrowings on commercially acceptable terms and at competitive rates, which could adversely affect their business, results of operations and financial condition.

Key Financials:

Conclusion:

On the latest year standalone EPS of 3.78, the stock is available in the IPO at a P/E of 8.5 times, which is attractive if the current growth rate can be sustained in profits. However, on a price to book valuation which is a better way to value a lending business, at the upper price band the stock demands a P/B multiple of around 1.1x. Which when compared to its close peers is not cheap. Yes, the industry in which the company operates in is attractive. Green energy is a strong long-term story in India. However, it is important to understand that the company is coming with its IPO at a time when the system level GNPAs numbers are at historical lows and going forward whether its asset quality would remain at lower levels is a major uncertainty. Therefore, we recommend investors to subscribe to this IPO for listing gains only.