IPO Analysis: Indian Renewable Energy Development Agency

IPO Rating: Apply for the long-term

About the issue

Established in 1987 as an NBFC, the Indian Renewable Energy Development Agency (IREDA) is a public limited government entity dedicated to promoting, developing, and providing financial assistance for projects related to new and renewable sources of energy, as well as energy efficiency and conservation.

The company is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 10. The IPO price range is set between Rs 30 and Rs 32 per equity share, resulting in a total issue size of Rs 2,150.21 crore at the upper price band.

The IPO is scheduled to commence on November 21, 2023, and will conclude on November 23, 2023. The market lot size for the IPO is 460 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 5,980 shares or a total investment of Rs 1,91,360 assuming the upper price band. 

Objects of the issue

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for augmenting the capital base to meet the company’s future capital requirements and onward lending. The company anticipates deriving advantages from the listing of equity shares on the stock exchanges, including improving the brand image and establishing a public market for the equity shares.

Promoter holding

The President of India acting through the Ministry of New & Renewable Energy, Government of India is the promoter of the company. The promoter, along with its seven nominees, currently holds a pre-issue shareholding stake of 100 per cent in the company.

Company profile

The Indian Renewable Energy Development Agency Limited (IREDA) is a Mini Ratna (Category - I) Government of India Enterprise, operating under the administrative control of the Ministry of New and Renewable Energy (MNRE). Established in 1987 as a non-banking financial company (NBFC), IREDA is a public limited government entity dedicated to promoting, developing, and providing financial assistance for projects related to new and renewable sources of energy, as well as energy efficiency and conservation. Its guiding principle is encapsulated in the motto: ‘Energy forever.’

IREDA offers a comprehensive array of financial products and related services, spanning from project conceptualization to the post-commissioning stage in renewable energy projects and equipment manufacturing. The financial assistance provided by IREDA includes both fund-based and non-fund-based facilities, encompassing project finance, short-term loans, debt refinancing, performance guarantees, and letters of comfort.

Its financing schemes encompass a wide range of sectors, including solar energy, wind energy, hydro energy, bioenergy, waste-to-energy, compressed biogas, and investments in new and emerging technologies. The company is primarily dedicated to facilitating the transition towards a greener and more sustainable future.

Financials 

Outlook and Valuation 

The company has consistently demonstrated robust growth in both revenue and net profit over the past few years. In H1FY24, the company reported impressive figures, achieving a revenue of Rs 2,320 crore and a net profit of Rs 579 crore. This represents a remarkable year-on-year growth of 47 per cent in revenue and 41 per cent in net profit. As of September 30, 2023, the company's return on equity stands at 9.26 per cent, while the return on assets is recorded at 1.14 per cent.

The issue is priced with a P/BV ratio of 1.11 times, calculated using its Net Asset Value (NAV) of Rs 28.80 as of September 30, 2023. At the upper price cap, it is priced at a P/BV ratio of 1.09, considering its post-IPO NAV of Rs 29.28 per share.

When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 6.3, aligning considerably with the industry average. As per its official documents, the company has referenced several listed peers, including REC Ltd and Power Finance Corporation which are currently trading at PE ratios of 7.71 and 4.79, respectively.  

The primary risk for the business revolves around interest rate fluctuations, given its dependency on interest income derived from loans. On the other hand, its engagement with Government of India (GOI) entities and in-depth understanding of policies provide it with access to substantial opportunities and enable effective project risk appraisal.

It's crucial to highlight the company's significant position as the largest pure-play green financing NBFC in India. This status allows it to capitalise on the rapid growth within the renewable energy sector, which is considered a sunrise industry. Additionally, the sector faces limited competition, further enhancing the company's potential.

Taking into account the company's historical financial performance, its standing in the industry, and the potential for future growth, we recommend investors to subscribe to the issue with a long-term perspective.