Can IREDA maintain its high valuations amid India’s renewable energy boom?

India’s renewable energy sector has experienced remarkable growth over the past few years, driven by government incentives and heightened interest from long-term investors.

While much attention focuses on investing in major solar and wind producers, a frequently overlooked opportunity lies within the enabling ecosystem—component makers and financiers.

One prominent player in this space is the Indian Renewable Energy Development Agency (IREDA), which has unveiled an ambitious plan to raise significant capital through both debt and equity to sustain its growth and maintain its credit ratings.

IREDA to raise Rs 25,000 crore in debt and Rs 4,500 crore in equity

IREDA is preparing to raise approximately Rs 25,000 crore from the debt market and Rs 4,500 crore through equity in the current fiscal year.

The company aims to secure government approval for a natural dilution of its stake by up to 10%, which will be crucial for its capital-raising efforts.

The funds raised will be essential for maintaining a healthy capital adequacy ratio (CAR) and supporting its expanding loan book, which has already seen record disbursements in recent years.

S&P ratings could help lower borrowing costs and boost growth

S&P Global Ratings recently assigned IREDA a long-term rating of ‘BBB-‘ and a short-term rating of ‘A-3’, with a stable outlook. This rating enables the company to expand internationally and access more attractive funding sources.

Maintaining these ratings is as important as obtaining them, according to IREDA’s Chairman and Managing Director, Pradeep Kumar Das.

This rating stability will support the company’s borrowing plan and help it tap into the overseas market to lower its borrowing costs further.

As of March 2024, IREDA’s capital adequacy ratio stood at approximately 20%, surpassing the Reserve Bank of India’s (RBI) prudential norm of 15%.

The company aims to keep this ratio between 17% and 18% to maintain its ‘AAA’ rating in the future.

Record financial performance

IREDA achieved record loan sanctions of Rs 373.5 billion and disbursements of Rs 250.9 billion in FY24. The company’s net profit for the year surged by 44.8% year-on-year (YoY), while its net interest income increased by 29.2%.

Such strong financial performance underscores IREDA’s dominant position in the green financing market and highlights its ability to capitalise on the ongoing renewable energy boom in India.

Plans for FPO, bonds, and green finance

IREDA’s capital-raising plans are diverse. In addition to debt and equity, the company is also considering issuing bonds, including sustainable and green bonds, in the GIFT City financial hub.

IREDA is contemplating a follow-on public offer (FPO) to raise Rs 40-50 billion, subject to government approval.

The FPO is expected to take place between November 2023 and February 2024, providing a much-needed equity infusion to maintain its stable credit rating.

IREDA is aiming to expand its financial assistance to various renewable energy (RE) projects, including emerging sectors.

With a loan book of Rs 631.5 billion at the end of June, marking a 33.8% increase from a year ago, IREDA is well-positioned to leverage its status as India’s largest pure-play green financing non-banking finance company (NBFC).

This focus on emerging sectors could ensure sustainable growth and improvement in asset quality over the long term.

Challenges and outlook for IREDA

Despite its strong performance, IREDA faces challenges. The company’s exclusive focus on the renewable energy sector makes it susceptible to policy changes that could impact its business.

Additionally, IREDA competes with other green financing firms, requiring it to sustain its growth momentum. Any missteps could negatively affect its stock.

The company’s high valuations, with a price-to-earnings (PE) ratio of 45 and a price-to-book (PB) ratio of 7.3, reflect investors’ high expectations for future growth. However, this also means there is little room for error.