Does Ireda deserve a green light for investing?
Subscribe to enjoy similar stories. The Indian Renewable Energy Development Agency Ltd (Ireda) stock fell by almost 7% after it announced the December quarter (Q3FY25) results. Though the net profit grew by 27% year-on-year to ₹425 crore, the drop in provision coverage ratio, both sequential and year-on-year, spooked investors.
The ratio fell to 44.5% from 53% in the preceding quarter and 48.3% in the quarter a year ago. While the deterioration in the ratio is a worry, the negative reaction of the stock price got amplified because the street needed a reason to correct the premium valuation. Even after the fall, the stock trades at 3.8x of FY27 book value, as per the estimates of Phillip Capital, which is expensive given the below 2% RoA in FY27.
So, why do investors give more importance to the provision coverage ratio than other parameters? Provision coverage ratio shows the amount a lending company has set aside for the bad debt or non-performing asset (NPA). A lending company that makes higher provision initially will show lower profit and vice versa leading to non-uniformity in reporting of earnings. This is precisely one of the two reasons for lending companies being valued on price-to-book value rather than price-to-earnings, the other reason being that the entire book value is essentially cash unlike in the case of industrial companies.
If a lending company is known for providing adequately for NPA, then it can be valued on price-to-earnings as well. As Ireda’s provision coverage ratio has declined, there is a possibility that it might have to make higher provisions in future unless the management is confident of recovering bad loans. Notably, the drop in the ratio is despite almost tripling the impairment charge
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