Better PSU Finance Stock: PFC vs IREDA

In the last 5 years, the government's capital expenditure budget has increased at a compounded annual growth rate (CAGR) of 27%.

In the coming years, with a stable government, the capital expenditure is likely to enhance even further.

Moreover, India's target to become net carbon zero by 2070 ensures that the government will likely allocate a decent amount to the power sector.

The interim budget allocated Rs 100 bn for solar energy, a jump of 110% from its revised estimates.

Wind energy projects bagged a total allocation of Rs 9.3 bn, a rise of 1.5% from its revised estimates.

As of March 2024, India's power sector has an installed capacity of 442 gigawatts (GW) and is expected to grow to 692 gigawatts by 2028. This translates to a compounded annual growth rate (CAGR) of 12%.

All of this indicates that companies with a government push might also announce fresh capital expenditures, leading them to raise funds.

So, IREDA or PFC, which power finance company is the better choice for investment in 2024?

In this article, we will compare both these companies and find out.

Business Overview

PFC

PFC was incorporated on 16 July 1986 and is a Maharatna (Schedule-A) Government of India enterprise, established as an NBFC.

This company is under the administrative control of the Ministry of Power.

The company offers rupee-term loans, short-term loans, equipment lease financing, transitional financing, etc. catering to various power projects across generation, transmission, and distribution segments.

The company has also ventured into the infrastructure and logistics segment, focusing on e-vehicle fleets, charging infrastructure, roads, ports, metro rail, smart cities, and other large infrastructure projects.

IREDA

IREDA is a Mini Ratna (Category - I) Government of India enterprise. This company falls under the administrative control of the Ministry of New and Renewable Energy (MNRE).

The government company was established as a non-banking financial company (NBFC) in 1987. It promotes, develops, and extends financial assistance to set up new and renewable energy and energy efficiency or conservation projects.

IREDA's mission is to become 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.

Particulars	PFC	IREDA
Market Cap (In Rs. Billion)*	1,767.7	594.5
Loan Book (in Rs. Trillion)^	4.8	0.6
% of renewables (incl hydro) in asset mix^	12.5%	59%

* as of 04th July 2024|^ as of 31st March 2024

With a market capitalisation of Rs 1,767.7 bn, PFC is the bigger power finance company among the two. The market capitalisation of IREDA is Rs 594.5 bn.

Although PFC has the higher loan book, IREDA wins when it comes to the renewable contribution in overall asset mix. PFC's loan book is 8 times the loan book of IREDA.

PFC vs IREDA: Which Stock is Better?

To understand which power finance stock among the two outshines, we analysed them on various parameters.

Both these stocks were put through a test based on their profitability, operational efficiency, financial efficiency, dividends, and valuations.

For profitability we took the 5-year median, while for operational efficiency and financial efficiency, we took the 3-year median of all the parameters.

Profitability

Net Interest Income (in Rs million)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5 Year CAGR
PFC	549,478	645,976	681,514	735,737	916,039	11%
IREDA	17,231	21,625	24,443	32,512	48,797	23%
PAT (in Rs million)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5 Year CAGR
PFC	94,772	157,162	187,682	211,786	264,613	23%
IREDA	2,146	3,464	6,335	8,646	12,522	42%

As can be seen in the table above, IREDA performs well when it comes to profitability. In terms of growth in net interest income and net profit both the companies are doing well with IREDA ahead of PFC.

Operational Efficiency

Net Interest margin (%)	Mar-22	Mar-23	Mar-24	3 Year CAGR
PFC	3.6%	3.4%	3.5%	-1%
IREDA	3.8%	2.8%	2.9%	-9%
Gross NPA	Mar-22	Mar-23	Mar-24	3 Year CAGR
PFC	5.0%	3.7%	3.3%	-13%
IREDA	5.2%	3.2%	2.4%	-23%
Net NPA	Mar-22	Mar-23	Mar-24	3 Year CAGR
PFC	1.6%	1.0%	0.9%	-19%
IREDA	3.1%	1.7%	1.0%	-32%

The operational efficiency of both the companies looks similar, but the pace at which they are achieving it is different.

The asset quality of both the companies is similar by end of FY24. In fact, both the companies are able to lower their gross non-performing assets (GNPA) and net non-performing assets (NNPA).

However, IREDA was able to reduce it at a higher pace than PFC. Having said that, the asset quality of both the companies is good.

Financial Efficiency

ROA	Mar-22	Mar-23	Mar-24
PFC	2.4%	2.5%	2.8%
IREDA	1.9%	2.0%	2.2%
ROE	Mar-22	Mar-23	Mar-24
PFC	28.3%	27.2%	26.2%
IREDA	15.3%	15.4%	17.3%

Both the companies have done quite well when it comes to financial efficiency. However, this time around PFC takes the lead.

Return on Assets (ROA) of PFC is better than IREDA, but the pace at which IREDA's ROA has jumped is noteworthy. This shows that, PFC earns better returns per rupee in loans disbursed.

In terms of return on equity (ROE), PFC outpaces IREDA. However, the ROE of PFC is consistently declining, while IREDA has been able to consistently grow it.

Dividends

Dividends are equally important along with profitability, operational efficiency, and financial efficiency.

When it comes to dividends PFC outpaces IREDA. Although IREDA has a history of paying dividends, for the past 3 years it has not paid any dividend.

However, according to the guidelines on capital restructuring of central public sector enterprises (CPSE), all CPSEs are required to pay a minimum annual dividend of 30% of PAT or 5% of their net worth, whichever is higher, unless an exemption is provided.

IREDA has received an exemption from the Ministry of Finance, Department of Investment & Public Asset Management with regards to payment of dividend for financial year 2021, 2022, 2023, and 2024.

In FY24 PFC declared a dividend of Rs 15.5, higher than what it declared in the previous financial year.

PFC's Dividend Payout Ratio (%)

Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
35.2	22.5	22.6	22.0	23.5

Although PFC is a dividend paying company, its dividend payout ratio has reduced from 35.22% in FY20 to 23.5% in FY24.

The dividend payout ratio is a good metric to understand how much percentage of the profits will be distributed as dividends.

Valuations

Buying stocks at a good deal always makes sense as it reduces your overall downfall risk due to value re-rating.

When it comes to valuing a finance company, price-to-book ratio (P/B) is one of the best valuation metrics to be relied upon.

Of course, you should not make decisions simply based on this metric. You also look at other factors that we discussed in this article.

For PFC, the price to book ratio stands at 1.7x and the same for IREDA is at 6.9x. In terms of valuations, PFC seems to be at a better position compared to IREDA. The price to book value (P/B) of PFC is lower than IREDA.

Therefore, we can say that PFC is available at relatively better valuations. IREDA, on the other hand, seems to be pricey as its P/B is higher than PFC.

Which Stock is Better?

Fundamentally speaking, both the companies are doing well. In terms of profitability IREDA scores over PFC. However, in terms of operational and financial efficiency PFC takes the lead.

Among the two, PFC has been consistently paying dividends since FY08, with FY19 being an exception. IREDA, on the flipside, does have a dividend paying history, but has not paid any dividends since FY21.

IREDA has identified 7 strategic segments where it is likely to expand. This is in alignment with the Indian government's focus. These key areas include:

• Green hydrogen and derivatives (including manufacturing)
• Pumped hydro storage power plants
• Battery storage value chain (including manufacturing, storage, recycling)
• Offshore wind
• Green energy corridor
• Rooftop solar panel
• Green mobility value chain (fuel cells, charging infrastructure, etc)

Moreover, IREDA is also focused on optimising borrowing costs. This in turn will enhance its competitiveness and profitability. To achieve non-linear growth, the company is streamlining its operating model.

PFC, on the other hand, has substantially reduced its conventional generation lending from 62% in FY19 to 39% in FY24.

Having said that, its growth will be majorly driven by lending to solar and wind projects and lending to distribution companies under the government scheme.

Moving ahead, PFC is likely to be more aggressive on the renewables segment as renewables is the future of the power sector.

So, there you go... a detailed competitive analysis of PFC vs IREDA. We hope this article shed some valuable insights and you got a lot of takeaways.

Still Confused Which is Better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!

PFC vs IREDA

You can also compare both the companies with their peers.

PFC vs REC

IREDA vs IRFC

Check out the PFC factsheet and IREDA factsheet for a detailed analysis.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...