@1957 that’s pretty insightful. Thanks!!
I agree that REC will be trading at a discounted PE to IREDA, but the point is how much discounted PE as compared to IREDA, currently REC PE is discounted by 50% in comparison to IREDA. What does your mind say?
other probable reasons why IREDA could continue to command a premium over REC/ PFC and REC / PFC could continue to catch up :
(1) REC PFC till date were financing thermal power projects which were having long gestation period of 4-5;years even more . The PPA normally for five years , lowered from 10 years earlier.
in comparison, renewable projects gestation period is 1- 2 years and normally PPA signed for long term 10-40 years. i can see PSP projects signed recently for 40 years.
so it goes in favour of Renewable energy financing.
That could be the reason both REC PFC are increasing their renewable portfolio. so market has re-rated these stocks.
In addition REC PFC have decided to add infra projects in to their portfolio which may be bit risky though. However the opportunities is huge in infra too.
(2) IREDA is 100% renewable and hence may continue to trade at a premium, though PE re-rating or de-rating or could take place depending upon financial performance
Discl: invested in all the 3 stocks. may be biased. not a buy sell recommendation. please do your own assessment before investment
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All good points that said. REC/PFC are much stronger franchisees and thus have greater scale efficiencies. Net result higher RoEs (which matters more than any other metric).
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Agree.
REC PFC have got Navratna status. so they can have easy access to capital
IREDA will also have access to cheaper funds due to its 100% renewable status.
Let us wait and see how market values these stocks in medium to long term 
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Is there a link between Navratna status and easy access to capital? I do not think so. Navratna status is just that you can take capex decision with some autonomy without going to the ministry
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I think so. Before lending any quantum of fund, Any lenders would examine the borrower type such as small medium large as per market Cap , it’s status.
The banks decide on quantum of fund and lend at different interest rates to different borrowers depending upon the company size , balance sheet etc.
A Navratna company can borrow raise funds from international market.
For more info on navratna psu, you may please refer link below
I would not necessarily agree with the fact that IREDA should get a premium.
The real opportunity is in financing the utility scale projects for a longer term (otherwise, it gets refinanced through foreign borrowing) - therefore, cost of the funds is crucial in this business. As far as financing the RE sector is concerned, PFC/REC have been in the business for long and understand its nuances well. Infact, financing state thermal sector is better as they are cost plus and don’t have re-financing risk - these contracts are also long term and have implicit or explicit state guarantee (which makes them virtually an arbitrage business).
Have been in the Power Sector for a long period and can say they have good people assessing the projects…
Disclosure: Have been invested in both PFC/REC for 4-5 yrs
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Not denying that REC / PFC are veterans in financing power sectors since decades.
As I can see from their website, IREDA can also finance utility scale power projects that REC PFC are mandated to finance , but IREDA would focus mainly on100% renewals. REC PFC can do both thermal & renewable & more recently infra projects also.
Further additionally IREDA can also finance micro renewable projects such as Bio-gas , Bio-ethanol, Roof top solar for individuals , societies , small medium offices. Even EV …
Perhaps Mr. market gives a thumbs up to IREDA for its 100% commitment to renewables , which is currently fancied by investors.
However , few quarters down the line only Financial performance would decide the valuation.
Discl: holding REC PFC since high Dividend yield period of 11-12%. IREDA I got a small allotment through IPO which I am holding. Would like to add further in declines
Not a buy or sell recommendation. Please do your own assessment before investing
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IREDA is not stopping. With last 2 days of surge in IREDA, IREDA is now trading at 26.5x and REC at 8.5x.
A premium of 3x justified for financing small renewable setups? I guess financing small projects will have higher administrative cost (people on ground to verify project setup, IT initiatives to support retail disbursements etc).
With REC venturing into infrastructure development loans too, they will have higher loan book which will translate to higher EPS too.
This gap of 3x in PE valuation is a balloon, IREDA should command a premium, but 200% is way too high, premium of 20-40% is justified.
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Agree. REC PFC is trying to catch up , but not at the same rate which IREDA is trading.
I was trying to add IREDA to my small.position I had from IPO… but the valuation is insane.
I think market is crazy on renewables. Perhaps there is a news item that IREDA has notified to general public that they are now open to lend for roof top solars for individuals.
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@1957 @anupam.s - Any targets in your mind to exit REC & PFC (either in terms of PE or absolute value? or planning to hold on untill Modi ji is in power.
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@1957 @ankiur.jain83 @anupam.s
if PFC/REC/IREDA all into same business.
Can we differentiate based on existing NPAs, future margin pressures ?
D.Small IPO position IREDA, continue to add…tempted to add more.
Hey, I do not think the comparison with IREDA is fair, at the end of day these are financial firms so the only reason I think IREDA has a higher valuation is maybe because investors are expecting its book size to grow faster, else i do not think this is justified. loans to renewables are not necessarily more profitable.
Disclaimer : This is my personal opinion and I am a shareholder , this is not a recommendation to buy or sell.
Agree with you all.
it is illogical.
Either REC PFC has to move up or IREDA has to come down sooner or later, once market realises the over valuation.
Good doucment by RBI on future of power financing
https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/03AR_16112023050545AA6E6A434D870BC012C8A85027.PDF
What i understand with respect to solar power from paper is that, by 2030 solar power installation is expected to double from current level.However coal power will still be ~38% from existing ~42%.
This presents better scope for renewable power financing business vis a vis thermal power.
Yes ?
was listening to the ET Now Interview with Mr Pradip Kumar Das , CMD of IREDA today
my take :
(1) Asset quality - since its inception in 1987, it had written off only 203 Crores till date
(2) Its RE portfolio : 60% Existing RE such as Solar wind Hydro big ticket items …here REC PFC also would compete.
(3) Another 40 % would be Emerging RE such as
Solar Roof top , Bio CNG / LNG, Bio Diesel, PM Kusum project, Green Hydrogen, e mobility / EV etc where REC PFC would not be competing.
(4) He said there is a 46 Lakh crore opportunity in RE.
(5) Expecting Maharana status very soon
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IREDA is on dope !
At Rs.85 it was well discovered & well priced
PE~34
are we missing anything or IREDA is simply being pumped ?
D.Small IPO position, been adding since listing but no more courage left in me !
Interesting, does someone have the NIM% for IREDA I could not find it.
NIM is 4% average of last 3 years as published during the IPO.
NIM that of REC PFC is 3.42 to 3.46 % .
But that does not explain so much difference in valuation.
Even 40% portfolio of emerging RE which IREDA has no competition does not explain such huge difference in valuation.
I can only say that it is an euphoric move by investors on renewals plus all PSU stocks getting re-rated. Market perhaps discounts PM Modi’s re-election in 2024.
Discl: Disposed off IREDA which I had got a small allotment in IPO and shifted the fund to PFC / REC where I see a lot of scope for catch up. May be i will catch up IREDA in declines if there is an opportunity.
This is not a buy sell recommendation. Please do your own assessment before you invest.
PSU stocks have inherent risk of frequent Govt policy changes , elections ahead
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