: Incorporated in 1986, IRFC
is a dedicated government entity engaged in financing the acquisition of rolling stock assets (wagons, trucks, electric multiple units, locomotives, coaches), leasing of railway infrastructure assets, and lending to entities under the Ministry of Railways (MoR), expansion plans, and asset management.
As per an IPO
note by Sharekhan, IRFC
financed an amount of Rs 71,392 crore, accounting for 48.22 per cent of the actual capital expenditure of the Indian Railways in FY20. In FY18, FY19, FY20, and in H1FY21, IRFC
financed rolling stock assets worth Rs 18,669.8 crore, Rs 24,055 crore, Rs 33,544.1 crore, and Rs 10,816.3 crore, respectively.
"We believe that the Indian Railways’ extensive future expansion plans will involve significant financing and we believe that operations, as a primary financing source for the Indian Railways, will increase significantly," it said in its note.
Healthy financial position: IRFC's overall revenues grew at a compounded annual growth rate (CAGR) of 19 per cent during FY17-20, driven by strong growth in AAUM (25 per cent CAGR). Its net profit grew by a CAGR of 26.3 per cent to Rs 3,192.1 crore during FY18-20 while RoE stood at 11.6 per cent in FY20.
Moreover, it has cost to income ratio of 2.94 per cent with NIM of 1.38 per cent. At the end of Q2FY21, its return ratios stood at 1.32 per cent/12.18 per cent for ROA/ROE. Furthermore, it has tier – 1 capital of 434 per cent of total risk weighted assets and has been consistently paying dividend with FY20 payout at 5.33 per cent.
Strong credit rating
: IRFC can source external commercial borrowings in the form of syndicated foreign currency term loans, issuance of bonds/ notes in offshore markets
at competitive rates. It is categorized as an “Infrastructure Finance Company” and is allowed to borrow up to $750 million from ECBs without prior approval from RBI.
Also, it has received the highest credit ratings from CRISIL – 'CRISIL AAA' and 'CRISIL A1+'; ICRA – 'ICRA AAA' and 'ICRA A1+'; and CARE – 'CARE AAA' and 'CARE A1+'.
Low business-risk: As per its terms of agreement with the MoR, risks relating to damage to rolling stock assets, due to natural calamities and accidents, are passed on to the Railways ministry. Further, the MoR is required to “indemnify the company” at all times from and against any loss or seizure of the rolling stock assets under distress, execution or other legal process.
"That apart, risk related to foreign currency hedging cost or hedging cost for interest rate fluctuation are built into weighted average cost of borrowing (WACB) of which IRFC earns a margin as determined by MoR. Even, lease payments by MoR form part of the annual railway budget in the Union Budget of India," said a report by Choice Broking.
Growth outlook: Amid the ongoing expansion and transformation plans of the Indian Railways, IRFC is expected to remain a major beneficiary. The Indian Railways proposed highest-ever capital outlay worth Rs 1.61 trillion in FY21 compared with Rs 1.48 trillion in FY20. Besides, it also planned to increase the doubling of tracks to 9.5 km per day in FY18 to reach 19 km per day in FY22.
With the expansion of the freight network and passengers demand, the requirement of rolling stock will increase substantially thereby to provide boost to IRFC’s business, say analysts.
Inexpensive valuation: At higher price band, LKP Securities values the stock at 1(x) FY20 P/BVPS.
"There are no comparable peer companies which operate in a business space similar to that of IRFC. However, relative to other PSU NBFCs, IRFC stands apart with nil NPAs but lower (albeit stable) margins. On a diluted basis at the upper price band, IRFC is valued at 1x FY20 BVPS. However, being the dedicated market borrowing arm for the Indian Railways, IRFC enjoys the highest possible credit ratings for an Indian issuer both for domestic and international borrowings," said a note by Sharekhan.
Verdict: Attractive valuation, healthy return-ratios, expectations to post strong growth, relatively low risk business model, strategic role in financing growth of Indian Railways, and long term prospects considering electrification and network expansion make analysts optimistic on the long-term prospects for IRFC.
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