IRFC IPO Review: Limited upside despite high growth

IRFC IPO Details:

IPO Date: Jan 18 to Jan 20, 2021

Total Shares for subscription: ~177.4 Cr

IPO Size: ~Rs. 4,600 Cr

Lot Size: 575 shares

Price Band: Rs. 25–26/share

Market Cap: ~Rs. 24000 Cr

Purpose of IPO:

• Fresh Issue (Rs 1,500 Cr) to be utilized for augmenting equity capital base for meeting future growth requirements and general corporate purposes.
• Proceeds of Offer for Sale (Rs. 3,100 Cr) to be received by Selling Shareholder only (Govt of India)

About Indian Railway Finance Corporation:

Incorporated in 1986 by the Ministry of Railways (MoR), the Government of India, Indian Railway Finance Corporation (IRFC) is a wholly-owned public-sector undertaking. Its primary activity is to mobilise funds on behalf of the Indian Railways to finance its procurement of locomotives, passenger coaches, and wagons as well as to fund other railway infrastructure assets.

Apart from providing finance to the MoR, IRFC has provided loans to Rail Vikas Nigam Limited (RVNL), which is wholly owned by the MoR. IRFC is registered as an infrastructure finance company-NBFC (NBFC-IFC) with the Reserve Bank of India.

IRFC is strategically important to the MoR as it raises around 25–35% of the total funding requirement (plan outlay) of the Ministry.

IRFC’s gross NPA percentage was nil as on December 31, 2019 (nil as on March 31, 2019) on account of its full exposure to the MoR or its controlled entities and the timely recovery of receivables. As the company’s entire exposure is to the MoR, its asset quality is likely to remain strong going forward as well.

In Fiscal 2020, IRFC financed ₹ 71,392 crores accounting for 48.22% of the actual capital expenditure of the Indian Railways.

Strengths:

• Strategic role in financing growth of Indian Railways: IRFC has regular demand for loans which is favourable for its asset growth. For the last 3 years, IRFC asset under management has grown at a CAGR of 22% from 1,20,000 Cr in Mar’17, Rs. 2,66,000 Cr in Mar’20.
• Competitive cost of borrowings: Because IRFC belongs to GoI, and lends to GoI owned entities, the cost of borrowing is very low for IRFC. For the last 3 years, the cost of borrowings for IRFC was 6.74% to 7.25% p.a.
• Consistent financial performance and cost-plus model: IRFC charges a fixed interest rate for sourcing loans for MoR. It gets fixed spread in the range of 0.3% to 0.4% above its cost of borrowings. This helps it earn a Return on Equity of 10–12% annually.

Weakness:

• Exposure to Govt entities at competitive rates puts a cap on its RoE to cost of capital.
• If the company gets more demand for loans, it will have to frequently raise equity capital from the market as RoE is inadequate to fund > 12%-15% growth

MoneyWorks4me Opinion

IRFC is the government financing arm for railways. It funds various MoR projects with leases or loans. It helps in raising funds at competitive and charges a commission.

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