Indian Renewable Energy Development Agency Ltd: Energised To Perform

IREDA’s commendable performance is reflected in its consistent ‘excellent’ ratings from the MNRE since fiscal 2021. With over 36 years of experience, the company specialises in financing various projects in the renewable energy (RE) sector, including solar, wind, hydro, biomass, waste-to-energy and green mobility, alongside energy efficiency and conservation projects 

Indian Renewable Energy Development Agency Ltd. (IREDA) is a wholly-owned Government of India enterprise operating under the Ministry of New and Renewable Energy (MNRE). Established in 1995, it holds the distinction of being designated as a public financial institution and is registered with the Reserve Bank of India as a systemically important non-deposit-taking, non-banking finance company with infrastructure finance company status. Recognised for its significant contributions, IREDA was upgraded to Schedule A in the list of central public sector enterprises (CPSEs) in 2023 and has held the Mini Ratna (Category I) status since 2015. [EasyDNNnews:PaidContentStart]
 

Asset mix of IREDA: 

(Source: IREDA, DRHP)
 

IREDA’s commendable performance is reflected in its consistent ‘excellent’ ratings from the MNRE since fiscal 2021. With over 36 years of experience, the company specialises in financing various projects in the renewable energy (RE) sector, including solar, wind, hydro, biomass, waste-to-energy and green mobility, alongside energy efficiency and conservation projects. It also extends financial support to emerging RE technologies like biofuel and green hydrogen. Offering a diverse range of financial products and services, IREDA provides long-term, medium-term and short-term loans, bridge financing, takeover financing, and loans against future cash flows. Additionally, it offers non-fund-based products such as letters of comfort and guarantee assistance schemes. 

Moreover, IREDA plays a pivotal role in implementing government schemes initiated by the MNRE, acting as both the fund handling agency and central nodal agency for programmes promoting biomass-based co-generation and energy from urban waste. It also oversees schemes under the Production Linked Incentive Scheme for solar PV modules. In addition to its financial endeavours, IREDA owns and operates a 50 MW solar photovoltaic project located within the Kasaragod Solar Park in Kerala. This project, fully commissioned in September 2017, contributes power to the Kerala State Electricity Board grid, further solidifying IREDA’s commitment to renewable energy development.
 

Sector Overview

The power sector functions through three primary segments: generation, transmission and distribution. Generation involves producing electricity from diverse sources like coal, diesel, nuclear and renewables such as solar and wind energy, typically carried out in power plants. Transmission utilities then convey this electricity from generation sites to distribution substations via a grid system at high voltages, followed by distribution entities delivering electricity to end consumers at lower voltages, completing the supply chain. 

India’s installed power capacity surged from 356 GW in fiscal 2019 to 416 GW in fiscal 2023, with an additional 4 per cent increase to 425 GW by September 2023. As the world’s third-largest energy producer and second-largest consumer, India is prioritising boosting the share of renewable energy. Renewable energy sources, including hydro, currently represent 42 per cent of installed capacity and are projected to nearly match conventional sources in the medium term, aligning with the government’s renewable energy agenda. Solar leads among renewables with 17 per cent of the total capacity, followed by hydro at 11 per cent and wind at 10 per cent.
 

Renewable Energy: Trend in Installed Capacity:

(Source: IREDA, DRHP) 

Globally, there has been a significant shift in the generation capacity mix due to increasing environmental concerns and climate change awareness. India, as an active participant, has initiated sustainable development efforts, including substantial additions to renewable energy generation capacity. According to the REN21 Renewables 2022 Global Status Report, India ranks fourth globally in total renewable energy installed capacity, wind power capacity, and solar power capacity. 

The country’s generation from non-fossil fuel sources constituted 42 per cent of the total installed generation capacity in 2022. Despite this progress, India’s total renewable power potential is estimated to be 1,639 GW compared to the installed capacity of 179 GW as of September 2023. The installed capacity of renewable energy has grown by 92 GW over fiscal 2015 to fiscal 2023, indicating a CAGR of around 10 per cent.
 

Financial Overview

IREDA boasts a market capitalisation of ₹40,706 crore. The promoter, which is the Government of India, currently holds about 75 per cent of the shares, while FIIs and DIIs possess around 1.88 per cent and 4.37 per cent of the shares, respectively. The free float of the company is at 18.75 per cent. Looking at the quarterly financial performance of IREDA, on a consolidated basis in Q3FY24, the company reported revenue of ₹1,253 crore which surged by 44 per cent as compared to ₹869 crore in Q3FY23, while the EBITDA of the company also soared by 65 per cent and stood at ₹386 crore as against ₹235 crore in Q3FY23. Similarly, the net profit of the company jumped 67 per cent to ₹336 crore as compared to ₹201 crore in Q3FY23. 

IREDA’s strong performance is credited to its loan book, which surged from ₹37,887.69 crore to ₹50,579.67 crore, marking a significant 33.50 per cent increase. Additionally, the net worth strengthened from ₹5,591 crore to ₹8,134.56 crore, reflecting a notable rise of 45.49 per cent. Noteworthy improvements in asset quality include net NPAs decreasing from 2.03 per cent to 1.52 per cent, indicating a reduction of 25 per cent in percentage terms. Similarly, gross NPAs declined from 4.24 per cent to 2.90 per cent, showcasing a reduction of 31.70 per cent in percentage terms. These metrics collectively underscore the institution’s robust financial performance and effective management of non-performing assets.

(Source: IREDA, Investor Presentation, Q3FY24) 

Looking at the previous three quarters’ financial performance of IREDA, on a consolidated basis, in 9MFY24 the revenue of the company stood at ₹3,573 crore which surged by 46 per cent as compared to ₹2,446 crore in 9MFY23, while the EBITDA of the company soared by 42 per cent and reached ₹1,206 crore as against ₹851 crore in 9MFY23. Similarly, the net profit of the company jumped 50 per cent to ₹915 crore as compared to ₹611 crore in 9MFY23. 

Upon analysis of the company’s financial status regarding liquidity and solvency, it is evident that the interest coverage ratio is at 1.55 times, the current ratio at 0.79, and the debt-to-equity ratio at 6.77. These figures indicate the company’s moderate debt levels and its ability to meet interest obligations. Collectively, these metrics portray a robust financial position concerning liquidity and solvency. Furthermore, in assessing performance indicators, the return on equity (ROE) is recorded at 15.4 per cent, while the return on capital employed (ROCE) stands at 8.17 per cent.
 

Outlook 

The Government of India’s ambitious target of achieving 500 GW of installed non-fossil fuel-based power capacity by 2030 necessitates substantial financing in sectors like solar and wind energy. Despite India’s vast solar potential of 749 GW, the installed capacity as of September 2023 stands at only 72 GW. Additionally, hydro power capacity is forecasted to grow at a CAGR of 6.3 per cent from fiscal 2023 to fiscal 2027, reaching 59.8 GW by fiscal 2032. To address these financing needs and bolster its market share in these sectors, the company plans to launch tailored financing products and expand its presence in consortium financing. 

Recognising the evolving business models in the solar and wind energy sectors, the company aims to introduce specialised financing products to support models like captive and merchant business setups. Consortium financing will also be emphasised, particularly for large-scale utility installations, including those in hybrid or round-theclock modes. Collaborations with financial institutions, as evidenced by signed memorandum of understandings (MoUs), aim to co-originate and co-lend funds for renewable energy projects, tapping into existing relationships with developers. 

Furthermore, the company intends to explore additional revenue streams through consortium financing, leveraging its expertise in structuring tailored financing solutions for renewable energy projects. It plans to facilitate access to capital markets for mature sectors through products like securitisation and infrastructure investment trusts’ financing. A state-focused business development strategy will leverage relationships with state governments to originate projects nationwide, while advisory services will be utilised to support projects with public sector entities like NHPC Limited and SJVN Limited. 

When examining IREDA’s key valuation metrics, the company’s price to earnings (PE) ratio is 46.4 times, which is significantly higher than its historical median PE of 31.6 times and its industry PE of 23.2 times. Additionally, the EV/EBITDA ratio stands at 24.6, which is also slightly higher than its historical EV/EBITDA median of 22. However, despite the positive growth expectations of the company and the renewable energy financing industry, there are concerns regarding the valuation of the company. Hence, we recommend HOLD.

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