
Does Ireda deserve a green light for investing?

Summary
- The drop in provision coverage ratio, both sequential and year-on-year, spooked investors.
The Indian Renewable Energy Development Agency Ltd (Ireda) stock fell by almost 7% after it announced the December quarter (Q3FY25) results. Though the net profit grew by 27% year-on-year to ₹425 crore, the drop in provision coverage ratio, both sequential and year-on-year, spooked investors. The ratio fell to 44.5% from 53% in the preceding quarter and 48.3% in the quarter a year ago. While the deterioration in the ratio is a worry, the negative reaction of the stock price got amplified because the street needed a reason to correct the premium valuation. Even after the fall, the stock trades at 3.8x of FY27 book value, as per the estimates of Phillip Capital, which is expensive given the below 2% RoA in FY27.
So, why do investors give more importance to the provision coverage ratio than other parameters? Provision coverage ratio shows the amount a lending company has set aside for the bad debt or non-performing asset (NPA). A lending company that makes higher provision initially will show lower profit and vice versa leading to non-uniformity in reporting of earnings. This is precisely one of the two reasons for lending companies being valued on price-to-book value rather than price-to-earnings, the other reason being that the entire book value is essentially cash unlike in the case of industrial companies. If a lending company is known for providing adequately for NPA, then it can be valued on price-to-earnings as well.
As Ireda’s provision coverage ratio has declined, there is a possibility that it might have to make higher provisions in future unless the management is confident of recovering bad loans. Notably, the drop in the ratio is despite almost tripling the impairment charge QoQ to ₹104 crore as gross stage 3 loans (equivalent of gross NPA) rose to 2.7%, up by almost 50 bps QoQ.
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Coming to other parameters of performance, Ireda continues to do well with net interest income growing by 39% year-on-year to ₹622 crore. This was largely on the back of 36% growth in loan book even though interest spread too expanded to 2.28% from 2.05%. Higher interest spread was owing to the yield on advances increasing by 9 bps year-on-year to 9.96% and cost of borrowings decreasing by 14 bps year-on-year to 7.68%.
Even though lending to ethanol and manufacturing segments showed robust growth on a low base, a closer look at the loan book shows that the highest absolute rise came in loan facilities to state utilities that rose to ₹12,512 crore from ₹7,464 crore in Q3FY24. Consequently, the share of the public sector in the loan book went up to 24% from 21%. The public sector loan book has low NPA risk due to the backing of the government. However, the remaining loan book exposed to the private sector needs to be closely watched.
Ireda stock turned out to be a multi-bagger since its listing in November 2023 at ₹60. Notwithstanding the fact that it is exclusively financing green power projects versus other power project financiers, NPA risks still lurk and it needs closer scrutiny before taking any view on the prospects of the stock. Also, even if Ireda’s growth rate in loan book might be higher, other companies like Power Finance Corp. that do all kinds of financing of power projects are trading at much lower valuation of about 1.1x of core book value based on September 2026 estimate of Motilal Oswal Financial Services, without factoring in value of the stake in REC.