Indian Railway Finance Corporation Limited (IRFC Ltd), the Indian Railways’ dedicated NBFC is going public. The Rs 4,633 cr-worth IPO, which is the first one to go live in 2021, opened for subscription yesterday and closes tomorrow. In this article, we analyse IRFC’s business model, its financials, and IPO details to help you decide whether or not to apply for the same.
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About IRFC Ltd
IRFC Ltd is registered as a systemically important NBFC under the category of an Infrastructure Finance Company with the RBI. It is the dedicated NBFC of the Indian Railways’, giving IRFC the status and advantage of being a monopoly in its field. Thanks to this, IRFC has played a vital role in enhancing the capacity of the Indian Railways by funding its annual plan over the last 3 decades.
Objectives of IRFC Ltd
- Finance the acquisition of rolling stock and infrastructure assets
- Leasing of railway infrastructure assets & national projects of the Government of India (GoI)
- Lending to other entities under the Ministry of Railways (MoR)
- Offer financial assistance to activities having forward and backward linkages
IRFC Ltd’s business
IRFC is a state-run non-banking financial corporation dedicated to serving the Indian Railways and other entities falling under the ambit of the Ministry of Railways. It is involved in borrowing, lending, and leasing activities, all relating to the Indian Railways. IRFC raises/borrows funds from the market and lends it to the Indian Railways, which uses the money to acquire rolling stock assets, both powered and unpowered vehicles including coaches, trucks, locomotives, containers, wagons, and trollies. This is one of IRFC’s sources of income.
The PSU NBFC also acquires assets required by the Ministry of Railways and offers the same on lease to the Ministry. In doing so, IRFC earns lease rentals. The lease period spreads across 15 yrs to 30 yrs, where the first 15 yrs focus on recovering the principal, the weighted cost of borrowing, and a margin; and the last 15 yrs generate revenue. IRFC also finances other entities under the Ministry of Railways (MoR) and facilitates priority capital expenditure (capex) for the national carrier.
Talking about raising funds, IRFC Ltd borrows from both domestic and/or international markets. It sources funds from diversified avenues including equity infusion, term loans from banks/financial institutions, taxable and tax-free bonds issuances, internal accruals, asset securitisation, ECB’s, and lease financing.
Cost-plus model of IRFC Ltd
IRFC operates on the cost-plus model, which is beneficial in many ways. For one, it earns an additional margin. The expenses of IRFC Ltd relating to foreign currency hedging costs or losses and gains along with hedging costs for interest rate fluctuations are included in the weighted average cost of incremental borrowing. On this, IRFC earns additional margin as decided by the MoR. Further, the arrangement also gives IRFC Ltd a relatively higher margin, making its liquidity position favourable. Moreover, this arrangement guarantees IRFC a profit margin, which is an advantage.
Highlights of IRFC Ltd
- IRFC gets sovereign support, which sets it apart from its peers
- IRFC Ltd receives lease rentals from Indian Railways 6 mth in advance, that is, in Apr and Oct
- Due to major exposure to the MoR, IRFC has 0 NPAs
- IRFC enjoys the highest credit ratings for an Indian issuer for both domestic and international borrowings
IRFC’s credit ratings
- CRISIL: AAA and A1+
- ICRA: AAA and A1+
- CARE: AAA and A1+
- Moody’s: Baa3 (Negative) rating
- Standard and Poor’s: BBB (Stable) rating
- Fitch: BBB (Negative) rating
- Japanese Credit Rating Agency: BBB+ (Stable)
About IRFC Ltd IPO
As mentioned, IRFC Ltd is the first PSU NBFC to go public. Here are a few details about the IPO.
- IRFC Ltd IPO consists of a fresh issue worth Rs 3,089 cr and an offer for sale of Rs 1,544.4 cr
- The shares will be issued at a face value of Rs 10 each and listed on both NSE and BSE, the likely date of which is 29th Jan 2021
- The IRFC Ltd IPO was opened on 18th Jan 2021 and will be closed on 20th Jan 2021
- The price band of the IPO is fixed at Rs 25 to Rs 26 and the minimum lot size is 575 shares
- 35% of the total issue size is reserved for retail investors, 50% for qualified institutional bidders (QIBs), and 15% for non-individual investors
- KFin Technologies Private Limited is the registrar of the IRFC IPO, which will take care of the allocation of shares and refund
- HSBC Securities and Capital Markets (India), SBI Capital Markets, DAM Capital Advisors, and ICICI Securities are the book running lead managers of IRFC IPO.
After issuing the IPO, the government’s stake in IRFC will reduce from 100% to 86.4%. Notably, IRFC Ltd has already raised Rs 1,389 cr from 31 anchor investors before the IPO.
Objectives of IRFC IPO
IRFC plans to use the IPO proceeds to:
- Augment its capital base for future growth requirements
- Meet general corporate purposes
Highlights of IRFC Ltd IPO
Cheap valuation, low-risk business model, and high creditworthiness of IRFC are a few factors that make the IRFC IPO an attractive investment opportunity. Valuation-wise, IRFC Ltd demands a P/B multiple of 1. This is much lower than what most other NBFCs with strong asset quality and sound fundamentals command: over 3.
- In FY 2020, IRFC financed 48% (Rs 71,392 cr) of Indian Railways’ annual capex
- As per the National Infrastructure Pipeline (NIP) task force, Indian Railways’ annual projected capex between FY 2020 and FY 2025 is Rs 13.7 lakh cr, boosting IRFC’s business growth
- Between FY 2018 and FY 2020, IRFC’s revenue rose by 20% annually while net profit grew by 26.2%
- Thanks to 100% exposure to the Indian Railways or its controlled entities for which the RBI has exempted the company from asset classification norms, IRFC boasts 0 NPAs
- The MoR has never defaulted its lease payment obligations and it is expected to continue, which means good news for IRFC
Financial performance of IRFC Ltd
- While IRFC Ltd had financed 48.22% (71,392 cr) of Indian Railways’ capex outlay in FY 2020, in the current year, it expects to contribute over Rs 1.10 lakh cr
- As of Sep 2020, IRFC’s assets under management stood at Rs 2.78 lakh cr of which 55.34% belonged to lease receivables of rolling stock assets, 2.25% to central public sector enterprises entities, and 42.41% of advances against leasing of project assets
- As of the same date, IRFC’s net worth was Rs 31,686 cr, gross NPAs was 0, and net interest margins was 0.71%
- The PSU NBFC’s capital adequacy ratio as of 31st Mar 2020 and 20th Sep 2020 were 395.39% and 433.92%, respectively
- Over the financial years of 2018 and 2020, IRFC’s revenue and profits have grown at CAGR 21% and 26%, respectively.
- IRFC, unlike other PSUs, follows its own dividend policy. The company is known to offer regular dividends, maintaining a payout ratio of 11% to 22%. The payout ratio for FY 2020 was 5.33%
Following are charts depicting IRFC’s lease income, finance cost, and profit before tax for FY 2018 to FY 2020
Lease income grew at CAGR 14% from FY 2018 to FY 2020
Finance cost is growing at 23.74% CAGR from FY 2018 to FY 2020
Profitability (PBT) at 12.28% CAGR from FY 2018 to FY 2020
Future of IRFC Ltd
Currently, IRFC enjoys a monopoly in its business. However, analysts expect the future earnings of IRFC Ltd to be rather stable than increased due to a high dependence on financing the Indian Railways and the government’s capex on the national carrier.
The NBFC is looking to enhance its financing portfolio by funding the expansion of the existing network and future requirements of the Indian Railways including the high-speed train project and public private partnership (PPP) plan. Moreover, the government’s policies to liberalise the Indian Railways such as developing freight corridors, elevated corridors, and high-speed railway and 100% FDI on automatic routes in railway infrastructure activities are likely to benefit IRFC Ltd.
IRFC is also looking to diversify its lending and borrowing portfolio. It is also planning to offer advisory and consultation services for fundraising and financial activities. Ergo, looks like IRFC’s prospects are shiny. Finally, the Union Budget has proposed a capex of Rs 1,61,000 cr for the Ministry of Railways for FY 2021, the highest allocation so far. It was Rs 1,48,064 cr for FY 2020, of which IRFC funded over 48%.
Risk factors of IRFC IPO
The fact that IRFC enjoys monopoly gives away its major risk of high concentration as it heavily depends on the Indian Railways for revenues. Ergo, any change in the policies, capex plans, changes to terms of the agreement, and other associated risks may be detrimental to IRFC’s business. Further, privatisation of the Indian Railways exposes the PSU NBFC to the risk of NPAs.
Not to forget, IRFC came into being because the MoF refused to be a mere agency that raises funds for MoR. Ergo, if the Ministry of Finance (MoF) decides to raise funds directly, IRFC can run out of business.