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IREDA’s proposed IPO to boost renewable financing

The Cabinet Committee on Economic Affairs recently approved the proposed listing of the Indian Renewable Energy Development Agency (IREDA), reiterating its emphasis on green energy development. The move, interestingly, comes within days of the US government announcing its withdrawal from the Paris agreement on the ground that the deal favoured India and China.

IREDA’s decision to launch its initial public offering (IPO) is rightly timed. Given the stiff renewable energy targets, IREDA will need to lend a higher quantum of funds. Moreover, in the Union Budget 2017-18, the government has lowered its estimated borrowing target by a massive 34 per cent to Rs 80.43 billion. This is even lower than the Rs 92 billion borrowing target that was set in the 2016-17 budget (which was later revised to Rs 122 billion). Given that IREDA is one of the prime lenders to the sector, the lower availability of capital will increase lending costs, which may directly impact consumer tariffs.

The share sale through the IPO will increase IREDA’s equity base and help it raise more debt resources for funding renewable energy projects. The public issue will also enable IREDA to unlock its true value and increase its visibility in domestic and international financial markets. IREDA’s listing will make it more transparent and more professional in its operations.

Currently, the organisation raises funds from international development agencies such as the Asian Development Bank and the German government-owned KfW. It also builds its corpus by issuing bonds for clean energy development projects. It hedges its borrowing in foreign currency-denominated financial instruments. Since the agency’s foreign borrowings are backed by the Indian government, development agencies and bond holders are assured of returns. IREDA then routes its borrowed corpus for financing clean energy projects in India. The PSU’s lowered borrowing could reflect in lower lending.

IPO details

The cabinet has approved an issue of 139 million equity shares of Rs 10 each. This will increase the agency’s paid-up share capital from Rs 7.84 billion to Rs 9.23 billion. At present, the company has 784.6 million equity shares.

It has also approved the issue of shares to retail investors and IREDA employees at a discount of 5 per cent on the issue price, with a cap of 0.5 per cent on equity post the issue for central public sector enterprise employees. The allocation for retail investors in the net offer will not be less than 35 per cent, according to the Securities and Exchange Board of India [SEBI] (Issue of Capital and Disclosure Requirements) Regulations, 2009. However, the number of shares proposed to be issued to employees and retail investors will be finalised in consultation with the lead managers and as per the SEBI regulations.

Financial performance so far

IREDA has been consistently profitable for the past 10 years. Its profit after tax shows a compound annual growth rate (CAGR) of 11.5 per cent during the period 2011-12 to 2015-16. It also has adequate capital provisioning, with a capital adequacy ratio of 18.31 per cent as on September 30, 2016. Further, it has 4.6 per cent of total loans disbursed as non-performing assets (NPAs) (gross NPA percentage). Accounting for provisions, this percentage falls to 2.66 per cent (net NPA percentage). The earnings per share increased from Rs 85.79 in 2006-07 to Rs 379.86 in 2015-16, corresponding to a CAGR of roughly 16 per cent. These factors show that IREDA is in good financial health and its IPO can yield a significant amount of funds to support its lending targets.

IPO timing

The growth of renewable energy in India and the increased quantum of financing required to achieve the target call for stronger and larger financing and refinancing agencies. A better-funded IREDA that is more professionally managed would give a major boost to renewable energy financing.

The equity market in India has been growing at an excellent rate. The Bombay Stock Exchange (BSE) Sensex grew from 26,400 in June 2016 to about 31,300 in June 2017, a year-on-year growth of about 18.5 per cent. The National Stock Exchange’s (NSE) Nifty too has shown a year-on-year growth of 18.8 per cent. This growth trend in the secondary equity markets can open up avenues for IREDA to further raise money through a follow-on public offering or other means. This will increase its share capital and its capacity to leverage debt resources. These factors, coupled with policy initiatives for strengthening power transmission and distribution, indicate strong future growth for IREDA. Clearly, IREDA’s IPO is a step in the right direction.

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