Indian Renewable Energy Development Agency coming with IPO to raise upto Rs 2150.21 crore

Indian Renewable Energy Development Agency 

• Indian Renewable Energy Development Agency (IREDA) is coming out with a 100% book building; initial public offering (IPO) of 67,19,41,177 shares of Rs 10 each in a price band Rs 30-32 per equity share.  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors. 
• The issue will open for subscription on November 21, 2023 and will close on November 23, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 3.00 times of its face value on the lower side and 3.20 times on the higher side.
• Book running lead managers to the issue are SBI Capital Markets, IDBI Capital Markets and Securities and BOB Capital Markets.
• Compliance Officer for the issue is Ekta Madan.

Profile of the company

The company is a wholly owned Government of India (GoI) enterprise under the administrative control of the Ministry of New and Renewable Energy (the MNRE). The company was notified as a ‘Public Financial Institution’ (PFI) under Section 4A of the Companies Act, 1956 by the Department of Company Affairs, Ministry of Law, Justice and Company Affairs, Government of India on October 17, 1995 and is registered with the Reserve Bank of India (the RBI) as a Systemically Important Non-Deposit-taking Non-Banking Finance Company (a NBFC-ND-SI), with Infrastructure Finance Company (IFC) status. In September 2023, it has been upgraded from Schedule B to Schedule A in the list of CPSEs by the Department of Public Enterprises (DPE). It was also conferred with the Mini Ratna (Category I) status in June 2015 by the DPE. Since Fiscal 2021, it has consistently been rated ‘Excellent’ by the MNRE in course of evaluation of its performance in achieving key targets.

The company is a financial institution with over 36 years of experience in the business of promoting, developing and extending financial assistance for new and renewable energy (RE) projects, and energy efficiency and conservation (EEC) projects. It provides a comprehensive range of financial products and related services, from project conceptualisation to post-commissioning, for RE projects and other value chain activities, such as equipment manufacturing and transmission. The company has financed projects across multiple RE sectors such as solar power, wind power, hydro power, transmission, biomass including bagasse and industrial co-generation, waste-to-energy, ethanol, compressed biogas, hybrid RE, EEC and green-mobility. It also offer financial products and schemes for new and emerging RE technologies such as, biofuel, green hydrogen and its derivatives, battery energy storage systems, fuel cells, and hybrid RE projects.

It offers a comprehensive suite of financial products and services including various fund-based and non fund-based products. Some of its key fund-based products for RE developers are long-term, medium-term and short-term loans (for projects, manufacturing and equipment financing), top-up loans, bridge loans, takeover financing, and loans against securitization of future cash flows. It also provide line of credit to other NBFCs for on-lending to RE and EEC projects. In addition, it provides loans to government entities and also provides financing schemes for RE suppliers, manufacturers and contractors. Its non fund-based products include letter of comfort, letter of undertaking, payment on order instruments and guarantee assistance schemes. Further, it provide consulting services on techno-commercial issues relating to the RE sector.

Proceed is being used for:

• Augmenting the capital base to meet future capital requirements and onward-lending.
• Receiving the benefits of listing the Equity Shares on the Stock Exchanges, including enhancing the brand image among existing and potential customers and creating a public market for the Equity Shares in India. 

Industry overview

The power industry is divided into three segments: (i) Generation, (ii) Transmission, and (iii) Distribution. Generation is the process of producing electricity from different sources like thermal energy (coal, diesel, among others), nuclear and renewable sources such as sunlight and wind, natural gas, in generating stations or power generation plants. Transmission utilities transport large amount of electricity from power plants to distribution substations via a grid at high voltages. Retail electricity distribution, which is the distribution of electricity to consumers at lower voltages, forms part of the distribution segment. Indian power generation sector is one of the most diversified in the world. Power generation sources in India range from conventional sources such as coal, lignite, natural gas, oil, and nuclear to viable unconventional sources such as wind, solar, hydro, agricultural and household waste. 

Electricity generation in India increased from 1,372 BU in Fiscal 2019 to 1,618 BU in Fiscal 2023, implying a CAGR of 4.2%. Electricity generation increased by about 6% year-on-year to 745 BU during April 2023 to August 2023. Thermal power forms the largest source of power in the country with about 75% of the electricity consumed being generated from thermal power plants. Renewable Energy Sources (RES) including solar, wind and hydro are quickly increasing their share and their contribution has increased from 19.1% in Fiscal 2019 to 23% in Fiscal 2023. The installed power capacity in India has increased from 356 GW in Fiscal 2019 to 416 GW in Fiscal 2023; it increased by 4% year-on-year as on September 2023 to 425 GW; India is the world's third-largest producer and second-largest user of energy. While conventional sources currently account for 58% of installed capacity, with the GoI's ambitious projects and targets, power generated from RES including hydro, which currently accounts for 42%, is expected to have nearly equal in contribution compared to conventional sources in the medium term. With consistent focus on renewable sector, the percentage share of installed capacity is expected to shift towards renewable energy.

India has a significant amount of solar energy potential. Approximately 5,000 trillion kWh of energy is incident over India's geographical area each year incident over India’s land area with most parts receiving 4-7 kWh per square meter per day. Further, solar PV power can effectively be harnessed, providing huge scalability in India and at the same time, has the ability to generate power on a distributed basis and enables rapid capacity addition with short lead times. India has a solar potential of 749 GW, assuming that solar PV modules cover 3% of the waste land area. Comparatively, India had an installed capacity of 72 GW of as on September 2023. The top ten states, which account for around 75% of the total solar potential, have an installed capacity of 65 GW, which is only around 9% of their potential and hence there is a significant untapped solar potential across India.

Pros and strengths

Strategic role in Government of India initiatives in Renewable Energy sector: The company is a wholly owned GoI enterprise under the administrative control of the MNRE. Since its inception, it has been closely involved in the development and implementation of various policies and schemes for structural and procedural reform in the RE sector. It was also the fund handling agency for the Solar Water Heating System Capital Subsidy Scheme. It has expanded its financing services in line with the RE priorities of the GoI such as solar, wind, hydro power, biomass, co-generation, among others. The GoI has highlighted priority areas for RE generation, including RE component manufacturing (solar modules, hydrogen electrolysers, battery storage, among others), green energy corridor, green hydrogen production, utility-scale battery storage, pumped storage hydro, ethanol, green mobility and rooftop solar power. In addition, it provides consulting services on techno-commercial issues relating to the RE sector. In Fiscal 2021, it entered into an MoU with SJVN, an Indian public sector hydroelectric power company, to provide techno-commercial consultancy services in the field of RE. In Fiscal 2022, it entered into an MoU with Brahmaputra Valley Fertilizer Corporation for such consultancy services as well. In addition, it has entered into an MoU with NHPC, a hydroelectric power company, to provide NHPC with consultancy services for RE projects.

Established and trusted brand name operating in rapidly expanding sector: With the announcement of 500 GW non-fossil fuel based capacity installation by 2030 and net-zero emissions by 2070, India has set itself on one of the most accelerated energy transition trajectories in the world. Its position as the largest pure-play green financing NBFC in India places among select players who are well placed to capitalise on the rapid growth in the RE sector. Its brand is strengthened by its role as the implementation agency for several prominent MNRE schemes and policies. Its exclusive focus on green finance has led to domain knowledge across various RE sectors from a technical and financial perspective based on its experience of more than 36 years. As of September 30, 2023, it had 357 RE borrowers across more than 10 RE sectors such as solar, wind, hydro, biomass, co-generation, EV, waste-to-energy, EEC, manufacturing, ethanol, among others. Its reputation has been built on its expedited processing of loan applications, structuring of financial products based on the needs of developers and responsiveness to customer queries and issues through the term loan lifecycle.

Digitized process for borrower centricity and operational scalability, with presence across India: The company has a robust IT infrastructure with an Enterprise Resource Planning System (ERP System) tailored to its business requirements. In addition, it benefit from its integrated ERP comprising business processes such as finance and accounts, payroll, human resource management system, employee self-service, loan origination system and loan management system, liability management system, legal, credit risk rating system, inventory management, and project monitoring and risk management. It continually improves its IT structures with a view towards creating an integrated system to unlock operational efficiencies, create financing risk insights and enable management review. In addition to its digital interventions, it has also expanded its physical presence across India. It organizes physical and virtual stakeholder meetings on a quarterly basis which provides borrowers with the opportunity to directly interact with its senior management to highlight any concerns, in a transparent manner. 

Comprehensive data-based credit appraisal process and risk-based pricing: The company has comprehensive credit appraisal policies and procedures which enable it to effectively appraise and extend financial assistance to various RE projects, including new and emerging RE sectors, while maintaining asset quality. Its appraisal process assesses key parameters spanning sponsor support, borrower creditworthiness and history, technological specifications/performance of the project, working capital funding arrangement, offtake agreement, and other statutory compliances, among others. Each loan proposal under consideration is graded using its proprietary Credit Risk Rating System (CRRS), which captures seven types of risks as of September 30, 2023, and multiple risks including permitting risk, execution risk, generation risk, operating risk, off-taker risk, sponsor risk, and project funding and financial risk for comprehensive risk assessment. The applicable interest rate is finalised for a project based on the risk grade assigned by CRRS. Credit appraisal proposals are reviewed by an internal screening committee, which includes its Chief Risk Officer, to assess overall viability of the loan proposal. In addition, every credit appraisal undergoes an independent financial concurrence to validate the project viability model, compliances and other relevant documentation. 

Risks and concerns

Business entirely concentrated in, and dependent on, Indian RE sector: The company’s business is concentrated in, and wholly dependent on, the Indian RE sector. Installed capacity of renewable energy, including hydro power, has increased from 123 GW in Fiscal 2019 to 172 GW in Fiscal 2023. The total potential of renewable power in India is estimated to be 1,639 GW. Further, India aims to attain a non-fossil fuel-based installed power generation capacity of approximately 50% (500 GW) by 2030 and Net-Zero emissions by 2070. The viability of the RE sector is linked to a favourable policy framework and the related fiscal and financial incentives available there under. Reduction or withdrawal of these benefits may impact the sector adversely. In addition, issues relating to land acquisition, grid evacuation infrastructure, open access permission, grid management problem arising from the variable and intermittent nature of solar, wind and hydro power, tariff related uncertainties, prolonged project commissioning periods on account of delay in approvals from the state governments, large capital outlay, delay in payment to generators by DISCOMs, policy changes can affect project viability during the implementation/ operational stages, with negative impact on debt servicing capability of its borrowers and in turn will also adversely affect its business and operations.

The company may face asset-liability mismatches: In the past, the company’s funding requirements primarily have been met through a combination of equity investments by the GoI, the issuance of secured and unsecured non-convertible debentures and unsecured and secured long-term loans made available from domestic as well as multilateral and bilateral institutions. As of September 30, 2023, 78.93% of its total borrowings were long-term borrowings (excluding current maturities of long-term borrowings) and 84.36% of its Term Loans Outstanding as of such dates was long-term loans (excluding current maturities of long-term loans). In order to address the risk arising out of asset liability mismatch, it matches its lending with a similar maturity of borrowing or raise further borrowings to repay the existing borrowing. It has established an Asset Liability Committee for management of liquidity risks and for setting up liquidity risk tolerance and strategy. It undertakes a periodical review of assumptions used in liquidity projection and manages unexpected regulatory, statutory and other payments. It also maintains high-quality liquid assets in the form of investment in GoI securities.

RE projects seasonal and prone to vagaries of nature: RE projects, by their nature, are subject to seasonal performance. Generally, these RE projects witness peak seasons and lean seasons. As a result of these factors, its business may be subject to fluctuations in operating results and cash flows during any quarter or interim financial period, and consequently, such results cannot be used as an indication of its annual results, and they cannot be relied upon as an indicator of its future performance. 

Operate in highly competitive environment: The financial and banking sector in India is highly competitive and the company compete with a number of public sector finance companies, public sector banks, private banks (including foreign banks), financial institutions and other NBFCs. Competition in its industry depends on, among other factors, the ongoing evolution of GoI policies relating to the industry, the entry of new participants into the industry and the extent to which there is consolidation among banks, financial institutions and NBFCs in India. Many of its competitors may have larger resources or balance sheet sizes than it and may have considerable financing resources. In addition, since it is a non-deposit accepting NBFC, it may have restricted access to funds in comparison to banks and deposit-taking NBFCs as they may have wider access to funds, including through deposits. Its ability to compete effectively is dependent on its ability to maintain a low effective cost of funds. With the growth of its business, it is dependent on funding from the equity and debt markets and commercial borrowings. If it is unable to access funds at an effective cost that is comparable to or lower than its competitors, it may not be able to offer competitive interest rates for its loans to RE projects.

Outlook

Indian Renewable Energy Development Agency (IREDA) is a Mini Ratna (Category - I) Government of India Enterprise under the administrative control of Ministry of New and Renewable Energy (MNRE). IREDA is a Public Limited Government Company established as a Non-Banking Financial Institution in 1987 engaged in promoting, developing and extending financial assistance for setting up projects relating to new and renewable sources of energy and energy efficiency/conservation with the motto: ‘Energy For Ever’. IREDA has been notified as a ‘Public Financial Institution’ under section 4 ‘A’ of the Companies Act, 1956 and registered as Non-Banking Financial Company (NBFC) with Reserve Bank of India (RBI). IREDA’s mission is ‘Be a pioneering, participant friendly and competitive institution for financing and promoting self-sustaining investment in energy generation from Renewable Sources, Energy Efficiency and Environmental Technologies for sustainable development.’ On the concern side, the company’s business is, to a large extent, reliant on the strength of its brand and its reputation as a provider of financial assistance for projects relating to new and renewable sources of energy, other clean energy technologies, as well as energy efficiency and conservation. The high media scrutiny and public attention that the RE and financial services sectors are subjected to, in addition with increasing consumer activism in India, increases the risk of negative publicity and damage to its brand if it is presented in a negative light.

The issue has been offered in a price band of Rs 30-32 per equity share. The aggregate size of the offer is Rs 2015.82 crore to Rs 2150.21 crore based on lower and upper price band respectively. On the financial front, the company’s total income, comprising revenue from operations and other income, increased by 21.19% from Rs 28,741.55 million in Fiscal 2022 to Rs 34,830.44 million in Fiscal 2023, primarily due to higher interest income owing to increase in financial assets during Fiscal 2023. The company’s profit for the period increased by 36.48% from Rs 6,335.28 million in Fiscal 2022 to Rs 8,646.28 million in Fiscal 2023.  Meanwhile, the company plans to enhance its presence in consortium financing to support the increasing size of utility scale solar and wind installations, particularly those proposed to be set up in hybrid or round-the-clock modes. It also intends to pursue a state-focussed business development strategy leveraging its relationship with state governments to originate RE projects across India.