Introduction
IREDA's shares have been on a significant rally, but Phillip Capital remains skeptical about the stock's future. Despite recent improvements in asset quality, the brokerage firm has maintained its ‘sell’ rating on the Indian Renewable Energy Development Agency (IREDA), projecting a sharp decline in its share price.
Background on IREDA
Company Overview
The Indian Renewable Energy Development Agency (IREDA) is a prominent government agency focused on promoting renewable energy projects in India. Since its stock market debut, IREDA has seen a remarkable rise in its share price.
Recent Performance
IREDA made its stock market debut towards the end of last year, with its stock rising nearly tenfold within eight months of going public. For the quarter ending June 2024, the company reported a net profit of ₹384 crore, compared to ₹295 crore in the same period last year. Revenue from operations for the quarter was ₹1,502 crore, up from ₹1,144 crore in the corresponding quarter of the previous financial year.
Phillip Capital's Analysis
Stock Rating and Target Price
Domestic brokerage firm Phillip Capital has maintained its ‘sell’ rating on IREDA stock, raising the target price from ₹110 to ₹130. Despite this modest increase, the projected fall still represents a significant drop from current levels.
Reasons Behind the ‘Sell’ Rating
Passive Flows Driving Stock Rally
Phillip Capital noted that the recent stock rally is primarily driven by passive flows rather than fundamental factors. The brokerage firm believes that the best value of the stock has already been captured.
Margin Pressures
Although IREDA is expected to see strong loan growth at a CAGR of 25% over FY24-26 due to the rising demand for renewable energy, Phillip Capital does not anticipate earnings growth to keep pace with loan growth due to pressure on margins.
Exposure to Private Sector
The brokerage firm also pointed out the higher exposure to the private sector and the high proportion of the vulnerable portfolio as factors that do not inspire confidence for low credit costs in the medium term.
Financial Performance of IREDA
Improvement in Asset Quality
IREDA's asset quality showed sequential improvement, with gross NPA reducing to 2.19% from 2.36% in March, and net NPA improving to 0.95% from 0.99% in March. This indicates better management of non-performing assets.
Net Profit and Revenue
For the quarter ending June 2024, the company reported a net profit of ₹384 crore, compared to ₹295 crore in the same period last year. Revenue from operations for the quarter was ₹1,502 crore, up from ₹1,144 crore in the corresponding quarter of the previous financial year.
Future Projections
Loan Growth Projections
Phillip Capital expects IREDA to experience strong loan growth at a CAGR of 25% from the financial years 2024 to 2026, driven by increasing demand for renewable energy in India. Despite this, the brokerage firm anticipates that earnings growth will not keep pace with loan growth due to margin pressures.
Earnings Growth Expectations
“We expect IREDA’s earnings growth of 18%/20% in FY25/26, translating into return on equity of 16%. The stock trades at 7.6x/6.5x FY25/26 ABVPS of ₹35/42. While loan growth is high, return ratios are moderate and there is higher exposure to the private segment – which undermines conviction for continued lower credit cost. We expect ROA to decline to 2.2% /2.1% in FY25/26 from 2.3% in FY24,” said Manish Agarwalla, Research Analyst at Phillip Capital.
Market Reaction and Stock Performance
Recent Stock Performance
Shares of IREDA are trading 3.77 per cent higher at ₹294.99 during this afternoon's trade. The stock is up for the fourth consecutive session today, indicating strong short-term performance despite the brokerage's negative outlook.
Technical Indicators
On the charts, IREDA shares remain in 'overbought' territory, with a Relative Strength Index (RSI) of 83.6, suggesting a potential pullback in the stock.
Conclusion
While IREDA's robust loan growth and improving asset quality paint a positive picture, Phillip Capital's concerns about margin pressures and high exposure to the private sector highlight potential risks. Investors should consider these factors and the brokerage's ‘sell’ rating when making investment decisions.
FAQs
- Why has Phillip Capital maintained a ‘sell’ rating on IREDA? Phillip Capital cites margin pressures, high exposure to the private sector, and the recent stock rally driven by passive flows rather than fundamental factors as reasons for maintaining a ‘sell’ rating.
- What is the new target price set by Phillip Capital for IREDA? The new target price set by Phillip Capital is ₹130, up from ₹110.
- How has IREDA's asset quality improved recently? IREDA's gross NPA reduced to 2.19% from 2.36% in March, and net NPA improved to 0.95% from 0.99% in March.
- What are Phillip Capital's earnings growth expectations for IREDA? Phillip Capital expects IREDA’s earnings growth of 18%/20% in FY25/26, translating into a return on equity of 16%.
- What is the recent performance of IREDA's stock? Shares of IREDA are trading 3.77 per cent higher at ₹294.99, up for the fourth consecutive session today.
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