P/E is not the right valuation metric to value a financial stock. It should be price to book (p/b).
IREDA current trades at 5x p/b which makes it highly overvalued by any yardstick and seems to suggest a lot of “Green” premium. Fundamentally I don’t see any logic for green premium other than narrative and euphoria (which probably explains insanely ridiculous valuations of companies making solar panels and renewable energy).
A loan is loan, whether one calls it green or brown or any other color. A lending company, just by being in a green business, won’t be able to charge higher interest to its borrowers or borrow money at lower cost than its competitors who are NOT in green business.
When the hype around green lending starts cooling down, which could take several quarters, valuations should start reverting to industry mean.
Coming to REC, stock currently trades at 1.8 p/b which is higher than its historical p/b putting it slightly in the overvalued range. It’s interesting to note that when REC was listed it saw similar valuations as IREDA for a brief period before quickly settling down into 1.4-1.5 range. It’s only last year that PSU really has pushed its valuation into higher range giving it limited upside.
Given that REC mainly lends to power sector comprising of mainly government entities there is limited trigger for valuation rerating. But yes, smart narratives in bull markets can amplify the interest in a stock and if REC catches some of that we might see another round of action in the stock price.
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