Philip Capital projects over 60% fall in IREDA share price, maintains ‘sell’ rating; here’s why

Domestic brokerage firm Phillip Capital has maintained its ‘sell’ rating on Indian Renewable Energy Dev Agency (IREDA) stock, raising the target price from ₹110 to ₹130. The brokerage firm noted that the recent stock rally is primarily driven by passive flows rather than fundamental factors and has already captured the best value, according to a report by The Economic Times.

The firm acknowledged the continued growth of IREDA, expecting strong loan growth at a CAGR of 25% over FY24-26 due to rising demand for renewable energy in the country. However, they do not anticipate earnings growth to keep pace with loan growth due to pressure on margins.

The brokerage noted that the stock's current price already reflects the best possible outcomes.

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.

“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.

Phillip Capital stated in its note that IREDA's robust loan growth and pipeline indicate strong potential for balance sheet growth, with the company effectively managing its yields.

However, as leverage on the balance sheet increases, the brokerage anticipates that the net interest margin will come under pressure.

IREDA is projected 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, Phillip Capital expects that earnings growth will not keep pace with loan growth due to margin pressures.

"Higher exposure to the private sector and high proportion of the vulnerable portfolio do not provide confidence for low credit costs in the medium term," the brokerage added.

IREDA made its stock market debut towards the end of last year, resulting in its stock rising nearly tenfold within eight months of going public.

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.

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.

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.