IRFC IPO – Should You Invest?

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This coverage on IRFC IPO has been done by Anup Lamb for Investeek

Background of IRFC and IRFC IPO

Indian Railway Finance Corporation (IRFC) was set up on 12th December 1986 as the dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas Capital Markets.

IRFC is a Schedule ‘A’ Public Sector Enterprise under the administrative control of the Ministry of Railways, Govt. of India.

It is also registered as a Systemically Important Non–Deposit taking Non-Banking Financial Company (NBFC – ND-SI) and Infrastructure Finance Company (NBFC- IFC) with Reserve Bank of India (RBI).

In more than 30 years of existence, IRFC has played a significant role in supporting the expansion of the Indian Railways and related entities by financing a significant proportion of its annual plan outlay.

The Objective of IRFC IPO

The primary objective of the IRFC IPO is to meet the predominant portion of the ‘Extra Budgetary Resources’ (EBR) requirement of the Indian Railways through market borrowings at the most competitive rates and terms.

The Company’s principal business, therefore, is to borrow funds from the financial markets to finance the acquisition/creation of assets which are then leased out to the Indian Railways.

IRFC’s cumulative funding to the rail sector has crossed Rs.1.80 lakh crore as of 31st March 2017 and is all set to cross Rs.2.20 lakh crore by the end of March 2018.

The funds from IRFC IPO will be utilized for acquiring rolling stock assets and also building up infrastructure, constituting a significant part of the annual capital expenditure of Indian Railways.

So far, it has funded the acquisition of 8998 locomotives, 47910 passenger coaches, 2,14,456 wagons, which constitute around 70% of the total rolling stock fleet of Indian Railways.

From 2011-12 onwards, IRFC has forayed into the funding of railway projects and capacity enhancement works. The company has been assigned the additional task of funding Railway Projects through Institutional Finance to the extent of Rs.1.50 Lakh Crore by 2019-20.

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IRFC has also been lending to various entities in the Railway sector like Rail Vikas Nigam Limited (RVNL), Railtel, Konkan Railway Corporation Limited (KRCL), Pipavav Railway Corporation Limited (PRCL), etc.

IRFC’s constant endeavor has been to diversify its borrowing portfolio in terms of instruments, markets, and investors which has led to the Company meeting the targeted borrowings year after year, through the issue of both taxable and tax-free bonds, a term loan from banks/financial institutions besides offshore borrowings, at competitive market rate.

Business Details Related to IRFC IPO

Leased Assets

IRFC follows a leasing model to finance the rolling stock assets and project assets of Indian Railways.

The lease period is typically for 30 years, comprising a primary component of 15 years followed by a secondary period of 15 years.

As part of the lease, recovery of the principal component and interest is affected during the primary lease period and at the end of the lease, assets are typically sold to the MoR for a nominal price.

The Company has adopted a cost-plus lease arrangement with the Ministry of Railways which ensures a net interest margin for IRFC.

The MoR pays lease rentals to the Company on a half-yearly basis and the lease pricing comprises both principal repayment and interest payment.

Lending to Railways Subsidiaries

IRFC also has a presence in lending activities and has provided funds to various companies in the Railway sector like Rail Vikas Nigam Limited (RVNL), Konkan Railway Corporation Limited, Rail Land Development Authority, Railtel Corporation of India, and Pipavav Railway Corporation Limited.

IRFC’s foray into the funding of railway projects began in 2011-12 which has accelerated the project execution on many fronts like capacity enhancement etc.

Besides, the Company has been assigned the additional task of funding Railway Projects through Institutional Finance to the extent of Rs.1.50 Lakh Crore by 2019-20

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Funding Structure

IRFC has been meeting its funding requirements from various sources to extract the lowest possible pricing from the markets.

In addition to the equity infusion from time-to-time by the Government of India, IRFC has been mobilizing funds through both taxable and tax-free bond issuances, term loans from banks and FIs, and ECBs.

The funding plan of IRFC is carried out with the prime objective to minimize its price of borrowings which in turn will benefit the Indian Railways as it works on a cost-plus margin basis.

Credit Ratings

Domestic: During the financial year 2019-20, the Company’s long-term domestic borrowing program was awarded the highest credit rating of “CRISIL AAA/Stable”, “[ICRA] AAA (Stable)” and “CARE AAA [Triple A]” by CRISIL, ICRA and CARE respectively.

The Company also got its short-term borrowing program rated, obtaining the highest rating of ‘‘CRISIL A1+’’, ‘‘[ICRA] A1+’’, and “CARE A1+ [A One Plus]” by CRISIL, ICRA, and CARE.

Future Outlook of IRFC

The Government of India (GoI), in its Vision to achieve the GDP of $5 trillion by 2024-25, needs to spend about 100 lakh crore, over this period, on infrastructure and it plans to do so under its ambitious National Investment Plan (NIP), of which Railways has a sizeable share of around 13%.

NIP will enable well-prepared infrastructure projects, that in turn, will create jobs, improve ease of living, and provide equitable access to infrastructure for all, thereby making growth more inclusive.

NIP also intends to facilitate supply-side interventions in infrastructure development, to boost short-term as well as potential GDP growth.

Improved infrastructure capacities are also expected to drive the competitiveness of the Indian economy.

For the current fiscal, your Company has been assigned the annual borrowing target of Rs. 58,000 crore, which includes Rs. 29,300 crore for funding of Rolling Stock assets and funding of Railway projects through Institutional Finance to the extent of Rs.28,000 crore.

A target of Rs. 700 crore for meeting the debt funding requirements of RVNL has also been given.

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Financial Performance

Source: Annual Report

IRFC continued to exhibit healthy financial performance for FY 2019-20.
Revenue of Company has increased by Rs. 2,704.86 crores from Rs. 11,133.60 crore in 2018-19 to Rs.13,838.46 crore in 2019-20 showing a growth of 24.29%.

Profit before Tax (PBT) of Company for the year ending 31st March 2020, was Rs. 3,692.42 crore as compared to Rs. 2,901.58 crore for the previous year, registering a growth of 27.26%.

Profit after Tax (PAT) for the year ending 31st March 2020 was Rs 3,692.42 crore, which is the same as Profit Before Tax (PBT), as the Company has not made any provision for tax in its books, pursuant to its decision to exercise the option of lower tax rate permitted u/s 115BAA of the Income Tax Act, 1961, as introduced by the Taxation Laws (Amendment) Ordinance, 2019, dated 20th September 2019.

The Company’s taxable income was nil.

Watch: Anil Singhvi’s Views on IRFC IPO

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Prateek Goel

Prateek Goel

Co-founder of Investeek, Prateek has been investing in the stock markets since 2006 and has beaten the NSE/BSE on a consistent basis. At the age of 24, he was also featured in India Today for his expert insight on gold trading.
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