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IREDA: A Rounded Play on Renewable Energy

Did you know that India plans on reaching a renewable energy capacity of 500 GW by 2030? Let's put some context to this number so you understand why this is a big deal!


As of March 2024, India’s renewable energy capacity stands at 190 GW. In essence, India intends to increase its renewable energy capacity by 2.6x in just 6 years. This would imply an increase in renewable energy generation to the tune of 18% CAGR over 2030.


As an investor, a 18% CAGR is definitely eye popping. If you could find an investment idea to match such growth numbers, you’ve definitely added some huge potential to your portfolio.


But the problem is that the achievement of this ambitious target requires several dimensions to fall in place. This is evident from the government’s thrust on green hydrogen, wind power, battery energy storage, transmission and solar modules, among others.


In this context, where should one invest? What if we told you just one stock can cover a host of factors that collectively lead to India’s green targets?


*drumrolls* IREDA!


IREDA, Who?

IREDA or, Indian Renewable Energy Development Agency is a NBFC (Non-Banking Financial Company), which has captured the spotlight with its stellar debut on the Indian exchanges, delivering an astounding 3x return in just five months.


Simply put, IREDA finances projects in the renewable energy sector:


  • It raises money at cost-effective rates by issuing bonds, through banks and from foreign lenders

  • It then gives loans to companies (or government agencies) that are setting up projects in the renewable energy sector

  • When the money is repaid, it makes a spread - the difference between the rate it raises money at what it lends at


The fact that it is present in the high-growth renewable energy sector makes for most of its desirability. Over the last four years, IREDA’s loan book has gone up 3x. Given its positioning, and the fact that the industry itself is set to grow 3x over the next 6 years, IREDA seems well-placed to capitalise on opportunities.


What Makes IREDA Different?

IREDA distinguishes itself from other NBFCs by exclusively financing renewable projects, making it India's sole provider of green financing. It commands a near 33% market share in the renewable energy project financing space.


It has a well-balanced portfolio, which makes it a diversified bet despite its concentration in renewable energy:


  1. Its lending is spread across private players (75%) and public entities (25%)

  2. It lends to a wide range of use cases within renewable energy spreading across solar, wind, hydro, ethanol, transmission, biomass and EVs

  3. It doesn’t just offer project loans, but also has a range of products including refinancing, guarantee assistance, loans against securitisation of future cashflows, top-up loans, loan syndication, etc.

  4. It has presence in projects that are spread across 23 states and 4 UTs, with no state accounting for more than 15% of its gross loan portfolio


The benefits of a wide spread in its loan book, and quality of customers reflects in low delinquencies and high operating efficiency.

Metric

Measure - FY24

Gross Yield on Loan Assets (%)

10.0%

Net Interest Margin

2.9%

Gross NPA

2.4%

Net NPA

1.0%

Domestic Credit Rating for Long Term Borrowings

AAA

Government Support FTW

Other than the growth prospects and operational supremacy, the fact that IREDA is a government entity makes it even more attractive. Here’s why:


  1. Lower cost of borrowing - The government owns 75% of IREDA, making it a PSU. PSUs tend to have lower borrowing costs given the transference of a lower default risk status from the government

  2. Government support - The government infused Rs. 1,500 crore into IREDA back in 2022, catapulting a lot of its growth. This enabled the company to not just increase disbursements, but also shore up its net worth (to further leverage), up its credit rating, and even bring about operational efficiencies

  3. Rating upgrade - Additionally, IREDA made it to the headlines recently for a milestone moment, where it was bestowed with Navratna status, a prestigious upgrade from its previous Miniratna status. On achieving a higher status in the CPSE hierarchy, companies are able to unlock special benefits associated with the luxury of autonomy, further propelling growth


What Next?

Other than the benefit of just being present in a high-growth sector, IREDA can further propel growth using:


1. Its newfound navratna status

On achieving the navratna status, the company can take business decisions independently, without the approval of the government (which could lead to delays), and at the same time forge partnerships, set up overseas subsidiaries, and participate in joint ventures, among other things.

To this effect, there already seems to be potential, visible from:


  • IREDA signing agreements with banks such as Union Bank, Bank of Baroda, and Punjab National Bank to provide co-lending services

  • Floating a retail division for providing loans under the PM-KUSUM scheme, rooftop solar, and other B2C segments, tapping into a Rs. 34,000 crore opportunity


The status upgrade has a direct impact on stock price, as seen in Rail Vikas Nigam Limited, which gave a return of 128% in the 6 months after its upgrade, compared to a measly 13% before that.


2. Tapping into new segments

Within renewable energy IREDA has been increasing focus on emerging high-growth areas like battery storage systems, EVs, EV charging infra, green hydrogen, pumped storage hydro, fuel cells and RE component manufacturing.


Summing it Up

The outlook for India’s renewable energy sector is positive, with major policy announcements and ambitious targets. IREDA is a concentrated, yet well-diversified play in the sector, which makes for its uniqueness.


Add to this high financial growth, superior operating metrics, government ownership and expansion in newer areas and you’ve got a stock which has already been a multibagger in its short listing history.


However, the stock trades at an expensive 5x one-year forward Price to Book Value, which is at a steep premium to peers. Even if one were to assume a cap on valuations at current levels, the stock has potential to get support from the 18% projected growth in the industry, over the next 5-6 years - making it a rather interesting play on India’s ambitious green energy targets.

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