Domestic Brokerage Firm Phillip Capital Predicts Over 60% Drop 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. They believe the recent stock rally is driven by passive flows, not fundamental factors, and the current price already reflects the best possible outcomes, according to a report by The Economic Times.

Strong Loan Growth Expected

Phillip Capital expects IREDA to see strong loan growth at a CAGR of 25% over FY24-26 due to increasing demand for renewable energy in India. However, they don’t expect earnings growth to match loan growth due to margin pressure.

IREDA’s asset quality has improved, with gross NPA decreasing to 2.19% from 2.36% in March and net NPA improving to 0.95% from 0.99% in March.

Moderate Return Ratios and Margin Pressure

“We expect IREDA’s earnings growth to be 18% in FY25 and 20% in FY26, translating into a return on equity of 16%. The stock trades at 7.6x and 6.5x FY25/26 ABVPS of ₹35 and ₹42, respectively. While loan growth is high, return ratios are moderate, and there is higher exposure to the private segment, which undermines confidence for continued lower credit costs. We expect ROA to decline to 2.2% in FY25 and 2.1% in FY26 from 2.3% in FY24,” said Manish Agarwalla, Research Analyst at Phillip Capital.

Potential for Balance Sheet Growth

Phillip Capital noted that IREDA’s strong loan growth and pipeline indicate potential for balance sheet growth, with the company effectively managing its yields. However, they anticipate that increased leverage on the balance sheet will pressure net interest margins.

Despite strong loan growth at a CAGR of 25% from FY24 to FY26 driven by renewable energy demand in India, Phillip Capital expects earnings growth to lag due to margin pressures.

Concerns Over Private Sector Exposure

“Higher exposure to the private sector and a 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, with its stock rising nearly tenfold within eight months of going public.

Overbought Territory

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.

Financial Performance

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 percent higher at ₹294.99 during this afternoon’s trade. The stock is up for the fourth consecutive session today.