Indian Renewable Energy Development Agency (IREDA) is breaking new ground as it opens its Initial Public Offering (IPO) for subscription. This move marks a significant milestone for IREDA, the largest pure-play green financing Non-Banking Financial Company (NBFC) in India. The company aims to align its financing activities with global efforts to combat climate change and promote a transition to a low-carbon economy.
IREDA’s IPO consists of a fresh issue of 40.3 crore shares and an Offer for Sale of 26 crore shares, both with a face value of ₹10 each. Investors can bid in lots of 460 shares and in multiples thereof, with a price band set between ₹30 – ₹32 per share. If the IPO is successful, the company’s post-issue implied market capitalization could range between ₹8,063 crore and ₹8,601 crore.
Strengths:
IREDA is commendable for its status as the largest green financing NBFC in India. Its diversified portfolio prevents a concentration of loans in any particular state or region. Additionally, the company’s upgraded schedule-based categorization from Schedule B to Schedule A, as per the Department of Public Enterprise, brings positive implications for its organizational structure and the salaries of board-level incumbents.
Weaknesses:
IREDA faces challenges when it comes to return ratios, with low Net Interest Margins (NIMs) and spreads compared to its peers. The Provision Coverage Ratio of IREDA is also lower than its competitors, indicating weaknesses in recovery mechanisms. It has struggled to maintain compliance with international lines of credit, affecting its Gross Non-Performing Asset (NPA) levels. Furthermore, negative cash flows in the past have only turned positive recently, just ahead of the IPO.
Opportunities:
IREDA aims to capitalize on significant opportunities within the renewable energy sector, which is expected to require a funding influx of $223 billion over the next eight years to meet solar and wind capacity targets by 2030.
Threats:
Potential risks for IREDA include an increase in the cost of funds, which could impact margins. The health of Discoms (Distribution Companies) can also affect book quality and credit costs. Furthermore, the company’s book undergoes scrutiny from the Reserve Bank of India, with the last inspection in 2022. The downgraded rating by Brickwork Ratings in July 2023 adds to the potential challenges faced by IREDA. Lastly, downward tariff revisions can negatively impact discom repayments and, in turn, impact the company.
FAQ:
1. What is green financing?
Green financing refers to structured financing that supports projects aligning with global initiatives to combat climate change and promote a transition to a low-carbon economy.
2. What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company is a financial institution that provides banking services without holding a banking license. NBFCs perform activities such as lending, investing, and other financial services.
3. What are Discoms?
Discoms, or Distribution Companies, are public or private entities that distribute electricity to end consumers. They act as intermediaries between power generators and consumers.
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