IREDA Delivers Strong Q3 Performance with 38% Profit Surge
Shares of the Indian Renewable Energy Development Agency (IREDA) gained around 2% following the release of its December quarter results for FY26. The company reported a significant 38% increase in net profit, reaching ₹585 crore. This impressive growth was primarily fueled by robust interest income and controlled funding costs.
Interest income saw a healthy rise of 25% year-on-year, climbing to ₹2,130 crore. Meanwhile, the cost of funds increased at a slower pace of 19%. This favorable spread helped lift the net interest margin by 12 basis points to 3.74%.
Asset Quality Shows Mixed Signals Amid Growth
For the first nine months of FY26, IREDA's overall income grew by 27%. However, profit growth was more modest at 15%. Earnings faced pressure due to higher provisioning requirements. This followed the reclassification of a loan from FY20 as a non-performing asset (NPA) and the Gensol Engineering exposure turning bad.
On a sequential basis, asset quality displayed some improvement. Gross NPAs declined to 3.75% in Q3 from 4.13% in Q1. Yet, stress levels remain elevated compared to the 2.68% recorded in Q3 of the previous fiscal year.
The provision coverage ratio improved to 56.1% from 44.5% a year earlier. However, concerns persist as 55% of gross NPAs are over three years old. This raises serious questions about recovery prospects.
Business Momentum and Strategic Shifts
Business momentum for IREDA remains strong. The outstanding loan book expanded by 28% year-on-year, reaching ₹88,000 crore by the end of Q3FY26. Loan disbursement growth moderated to 32% in Q3, down from 54% in the first half of the year.
Following the Gensol episode, IREDA appears to be adjusting its lending strategy. Incremental lending is now tilting more towards the public sector. Public sector accounted for 40% of additions in Q3, up from a 28% share in the loan outstanding until Q2.
Funding Advantage Supports Profitability
Lower borrowing costs continued to support IREDA's profitability. The average cost of funds for the first nine months of FY26 stood at 7.07%, compared to 7.68% a year earlier.
ICICI Securities highlighted in a report dated 12 January that IREDA's AAA domestic rating, access to domestic bonds (about 87% of borrowings), external commercial borrowings, and approval of 54EC bonds ensure a competitive cost of funds. This strengthens the long-term return profile.
Purchase of 54EC bonds allows taxpayers to claim exemption from long-term capital gains tax on the sale of property. However, ICICI Securities cautions that the lender faces inherent risk of volatility due to lumpy exposures.
Valuation and Market Performance
Despite the strong earnings growth, IREDA shares have declined about 30% over the past year. This drop reflects ongoing market concerns over asset quality.
The stock, however, remains up more than four times from its IPO price of ₹32 in November 2023. At current levels, the stock trades at 2.36 times its FY27 estimated book value, according to Bloomberg data. This valuation appears reasonable.
Sustained credit growth and a clear improvement in asset quality will be crucial for any meaningful re-rating of the stock in the future.
