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“Subscribe” to
Indian Railway Finance Corporation
‘Long term investment’
15th Jan. 2021
Salient features of the IPO: Recommendation Subscribe
• Indian Railway Finance Corporation Limited (IRFC) is a dedicated Price Band Rs25-26 per share
market borrowing arm of Indian Railways. Face Value Rs 10 per share
Fresh Issue Size at
• As of H1FY21, IRFC’s AUM stood at Rs2,780 bn growing at a CAGR of higher price band Rs30,889.2 mn
27% since FY18.
Share for Fresh Issue 1,188.1 mn shares
Key competitive strengths: OFS Issue Size Rs15,444.6 mn
• Strategic role in financing growth of Indian Railways Total Issue Size Rs46,333.8 mn
• Competitive cost of borrowings based on strong credit ratings in India Bidding Date Jan 18' 2021 - Jan 20' 2021
and diversified source of funding MCAP at Higher Price
• Consistent financial performance and cost plus model Rs3,39,781.2 mn
Band
• Low risk business model DAM Capital Advisors
• Strong asset-liability management Limited, HSBC Securities
Book Running Lead and Capital Markets (India)
Valuation: At higher price band of Rs26, demanding valuation of
Rs3,39,781 mn is valued at P/BV of 1x to post issue adjusted BVPS of Manager Private Limited, ICICI
Rs26.6. There are no listed companies in India in the same line of Securities Limited, SBI
business. Capital Markets Limited
KFin Technologies Private
Registrar
Below are few key observations of the issue: (continued in next page) Limited
Industry NBFCs
• IRFC, incorporated on Dec 12’ 1986, is a dedicated borrowing arm of
Indian Railways (IR) playing a significant role in supporting the capital
enhancement of IR over the last three decades. Retail application money at higher cut-off price per
lot
• IRFC follows the financial leasing model for financing the rolling stock Number of shares per
assets. In FY20, the company financed 48.2% of the actual capital lot 575
expenditures and financed 76% of rolling assets purchased and leased Application Money Rs14,950 per lot
to Ministry of Railways (MoR).
• IRFC also deals in activity of leasing of railway infrastructure assets Allocation Detail
and lending to other PSU entities under the MoR. Qualified Institutional
50%
• AUM grew at a CAGR of 27% to Rs2,780 bn since FY18. As of H1FY21, Buyers (QIB)
IRFC’s AUM consisted of 55.3% of lease receivables primarily in Non-Institutional
relation to rolling stocks assets, 2.3% of loans to CPSEs and 42.4% of Investors (NII) 15%
advances against leasing of railways project assets.
Retail Individual
35%
• NIM reported at 1.6% in FY20 and 0.71% in H1FY21. IRFC has limited Investors (RIIs)
scope for margin expansion, as margin over the weighted average
cost of incremental borrowings (WACB) is fixed under the standard Shareholding Pattern
lease agreement every year. In FY20, margin was fixed at 40bps over Pre-Issue Post Issue
WACB for rolling stocks and a spread of 35 bps over WACB for Promoter & promoter
financing project assets. 100.0% 86.4%
group
• IRFC operates within almost no risk business model because of Public 0.0% 13.6%
sovereign exposure. Risk related to foreign currency hedging cost or Total 100.0% 100.0%
hedging cost for interest rate fluctuation are built into WACB of which
Source: Choice Broking Research, RHP
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. Analyst
• Further, as per the agreement, MoR to pay lease rental in advance in Satish Kumar
case of difficulties experienced by IRFC in debt servicing. Though, very (022-67079999; Ext:913,
Deskphone
low risk profile with fixed spread over WACB also limits the NIM as Mob:9167120440
well as RoE expansion. The company is assigned with AAA stable
Email satish.kumar@choiceindia.com
rating helping it to keep CoB low.
1
Continued……
• As IRFC deals with MoR, the company has nil GNPA as of H1FY21. CAR stood at 434% as no risk weight attached
to sovereign exposure.
• PAT grew by a CAGR of 26.3% to Rs31,921 mn during FY18-FY20 while RoE stood at satisfactory level of 11.6% in
FY20 considering the very low risk profile of the business. Mgmt expressed confidence of sustain/gradually
improve NIM and RoE with planned diversification of financing portfolio to include forward and backward
linkages for railways sector.
• Business growth is linked to IR expansion plan. With ongoing expansion and transformation plans of Indian
Railways, IRFC to remain major beneficiary. IR proposed Rs1,610 bn capital expenditures in FY21 (highest ever
capital allocation) v/s 1,481 bn in FY20. IR planned to increase the doubling of tracks to 9.5 km/day in FY18 to
reach 19 km/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.
• IRFC has maintained its dividend paying track record. The company has paid interim dividend of Rs0.53 in FY21
which translate to 2% dividend yield at higher price band of Rs26.
• At higher price band of Rs26, demanding valuation of Rs3,39,781 mn is valued at P/BV of 1x to post issue
adjusted BVPS of Rs26.6. There are no listed companies in India in the same line of business.
• Valuation at P/BV of 1x looks attractive for long term conservative investors, considering strong profitability
growth (CAGR of 26.3% during FY18-FY20), double digit RoE at (annualized 12.2% in FY21) and low risk profile of
business with zero GNPA.
Considering all these parameters, we assign ‘Subscribe’ rating to the issue.
© CHOICE INSTITUTIONAL RESEARCHAbout the issue:
• Indian Railway Finance Corporation Limited (IRFC) is coming out with initial public offering of Rs46,333.8 mn.
• The issue compromises fresh issue shares of 1,188.1 mn. At the higher price band of Rs26, fresh issue size is stood at
Rs30,889.2 mn.
• Promoter is selling 594 mn shares as offer for sale (OFS) which stands at Rs15,444.6 mn at the higher price band.
• IRFC is a state owned company as govt of India holds 100% of pre-issue paid up share capital. Post issue, govt stake
will reduce to 86%.
• Issue will open for subscription on Jan 18’ 2021 and close on Jan 20’ 2021
• Fresh issue proceed will be utilize to meet future capital requirements arising out of growth in business.
• Not more than 50% of the net offer shall be available for allocation on a proportional basis to a qualified institutional
investors (QIIs). Further not less than 15% shall be available for allocation on a proportional to non-institutional
investors (NIIs) and not less than 35% of net offer shall be available for allocation to Retail Institutional Investors (RIIs).
• Employee reservation portion is allocated at Rs5 mm
• IRFC has paid a dividend of Rs. 0.36, Rs. 0.48 and Rs. 0.21 per share for FY18, FY19 and FY21 respectively. IRFC has
already paid an interim dividend of 0.53 per share in H1FY21.
Indicative IPO process time line:
Unblocking of
Offer Closes on
ASBA Account
20-Jan-2021
27-Jan-2021
Offer Opens on Finalization of Commencement
18-Jan-2021 Basis of Credit to Demat of Trading
Allotment Accounts 29-Jan-2021
25-Jan-2021 28-Jan-2021Company introduction:
Indian Railway Finance Corporation Limited (IRFC) is a dedicated market borrowing arm of Indian Railways. The company
primary business is financing the acquisition of rolling stock assets which includes both powered and unpowered vehicles,
for example locomotives, coaches, wagons, trucks, flats, electric multiple units among others. IRFC is also responsible for
raising the finance necessary for activities such as leasing railway infrastructure assets and national projects of GoI and
lending to other entities under Ministry of Railways (MoR). The MoR is responsible for the procurement of Rolling Stock
Assets and for the improvement, expansion and maintenance of Project Assets. Over the last three decades, the company
has played a significant role in supporting the capacity enhancement of the Indian Railways by financing a proportion of its
annual plan outlay. In FY20, IRFC financed Rs714 bn accounting for 48.2% of the actual capital expenditures of Indian
Railways of Rs1,481 bn.
Source: Choice Broking Research, RHPBusiness Overview:
IRFC is a wholly owned by GoI (holds 100% pre issue stake) acting through MoR. The company is registered with RBI as a
systematically important NBFC. The company follows a financial leasing model for financing the rolling stock assets. The
period of lease with respect to rolling stock assets is typically 30 years comprising a primary period of 15 years followed by a
secondary period of 15 years, unless otherwise revised by mutual consent. In terms of the leasing arrangements, the
principal amount pertaining to the leased assets is effectively payable during the primary 15 years lease period, along with
the WACR and a margin determined by the MOR in consultation with IRFC at the end of each Fiscal. As per the agreement, a
nominal amount of Rs100,000 per annum shall be payable for the second 15 year period or until the rolling stock assets are
sold out to the MoR or any other buyer before the completion of the lease period. Lease rental during the second 15 year
period are subject to revision with mutual consent. The company also follows a leasing model for project assets with lease
period of 15-30 years depending on the mode of raising funds for such lending. As of Sep 30’ 2020, IRFC’s total AUM
consisted of 55.3% of lease receivables primarily in relation to rolling stocks assets, 2.3% of loans to CPSEs under the
administrative control of MoR and 42.4% of advances against leasing of project assets.
IRFC financed 72%, 93%, 84% and 76%, respectively in FY17, FY18, FY19 and FY20 of the rolling stocks purchased and leased
to MoR. To finance the planned capital expenditures of MoR, IRFC raises funds through various sources including issue of
taxable and tax free bonds in India term loans from banks/financial institutions, ECB, internal accruals, assets securitisation
and lease financing.
In FY20, IRFC entitled to a margin of 40 bps over the WACB for financing rolling stock assets and a spread of 35 bps over
WACB for financing project assets.
Financial Performance
Operating revenue rose to Rs134,211 mn in FY20 from Rs92,078.4 mn in FY18 and PAT to Rs31,921 mn in FY20 from
Rs20,015 mn in FY18. IRFC reported revenue of Rs73,848 mn and net profit of Rs18,868 mn in H1FY21. AUM which
represents sum of lease receivables, loans to other PSU entities and advances against leasing of project assets grew to
Rs2,780.1 bn in H1FY21 from Rs1,545 bn in FY18. The company reported disbursement of Rs714 bn in FY20 and Rs190 bn in
H1FY21 to MoR. Capital adequacy ratio as of FY20 and H1FY21 was 395.4% and 433.9% respectively. As of H1FY21, IFRC did
not have any non-performing assets. The company maintains highest possible credit ratings both for domestic and
international borrowings.
Key Financials
Particulars (Rs mn) FY18 FY19 FY20 H1FY21
Net Income (adj. with
25,693.8 28,042.9 32,583.6 19,421.4
interest cost)
Net Interest Margin 1.9% 1.7% 1.6% 0.7%
Total Income 25,702.5 28,042.9 32,584.3 19,438.5
Growth (%) 9.1% 16.2%
Pre-Prov. Operating Profit 25,319.4 27,828.9 31,942.4 18,868.4
Adjusted PAT 20,014.6 21,399.3 31,921.0 18,868.4
Growth (%) 6.9% 49.2%
AUM (Rs bn) 1,545 2,009 2,661 2,780
RoA 1.4% 1.2% 1.3% 0.7%
RoE 12.3% 9.5% 11.6%
Source: Choice Broking Research, RHPCompetitive strengths:
• Strategic role in financing growth of Indian Railways
• Competitive cost of borrowings based on strong credit ratings in India and
diversified source of funding
• Consistent financial performance and cost plus model
• Low risk business model
• Strong asset-liability management
Business strategy:
• Diversification of borrowing portfolio
• Broaden financial portfolio
• Continued focus on asset-liability management
• Provide advisory and consultancy services and venture into syndication
activities
Risk and concerns:
• Business growth depends upon the Indian Railways expansion
plan
• Government poor fiscal situation can impact railways
infrastructure investment
• Contained margin and limited scope for RoE expansion
© CHOICE INSTITUTIONAL RESEARCHFinancial statements:
Rs mn
Profit And Loss Statement Financial Ratios
Particulars FY18 FY19 FY20 H1FY21 Particulars FY18 FY19 FY20 H1FY21
Operating Revenue 92,069.7 1,09,873.5 1,34,210.2 73,831.2 Return / Profitability
Growth (%) 19.3% 22.1% Ratios (%)
Interest Expended 66,375.9 81,830.6 1,01,626.6 54,409.8 Net interest margin
Growth (%) 23.3% 24.2% 1.9% 1.7% 1.6% 0.7%
(NIM)
Net Income (adj. with interest
cost)
25,693.8 28,042.9 32,583.6 19,421.4 Cost of borrowings 6.8% 7.1% 7.3% 3.6%
Net Interest Margin 1.9% 1.7% 1.6% 0.7% EPS (Diluted) (Rs) 1.53 1.64 2.44 1.44
Other Income 8.7 0.0 0.7 17.1 RoA 1.4% 1.2% 1.3% 0.7%
% of Interest Income 0.0% 0.0% 0.0% 0.0%
Total Income 25,702.5 28,042.9 32,584.3 19,438.5 RoE 12.3% 9.5% 11.6% 6.1%
Growth (%) 9.1% 16.2% 0.0% Business Ratios (%)
Operating & Other expenses 383.1 214.1 641.9 570.1
AUM (Rs bn) 1,545.3 2,009.3 2,661.3 2,780.0
Pre-Prov. Operating Profit 25,319.4 27,828.9 31,942.4 18,868.4
Provisions and contigencies 275.4 21.4 Disbursements (Rs bn) 367.2 525.3 713.9 190.1
CAR (Basel III) 321.0% 347.0% 395.0% 434.0%
Operating Profit before Tax 25,319.4 27,553.4 31,921.0 18,868.4
Equity / Assets 12.6% 12.0% 11.0% 10.9%
Growth (%) 8.8% 15.9%
Pre-tax Margin % 98.5% 98.3% 98.0% 97.1% AUM / Assets 95.7% 97.3% 96.6% 95.2%
Tax 5,304.8 6,154.1 Cost/Income 1.5% 0.8% 2.0% 2.9%
% of PBT 21.0% 22.3%
Reported PAT 20,014.6 21,399.3 31,921.0 18,868.4 Asset Quality ratios (%)
Net Profit Margin % 77.9% 76.3% 98.0% 97.1% GNPA - - - -
NNPA - - - -
Adjusted PAT 20,014.6 21,399.3 31,921.0 18,868.4
Growth (%) 6.9% 49.2% Per Share Data (Rs)
EPS (Diluted) 1.5 1.6 2.4 2.9
Balance Sheet
Particulars FY18 FY19 FY20 H1FY21 DPS 0.4 0.5 0.2 0.5
Cash and balance with
1,966.7 1,277.6 1,007.6 958.8
BVPS 15.6 19.0 23.2 26.6
Reserve Bank of India……..
Valuation ratios (x)
Lease Receivables 10,94,716.6 12,50,265.1 14,85,798.0 15,38,468.1 P/E (x) 17.0 15.9 10.6 9.0
#REF! 52,379.6 58,954.9 64,233.7 62,430.4 P/BV (x) 1.7 1.4 1.1 1.0
Loans 139.8 131.5 115.1 114.1
Fixed assets 113.0 112.8 110.5 109.7 Growth ratios (%)
Other assets 4,65,194.9 7,53,641.2 12,03,776.4 13,17,784.8 AUM 30.0% 32.4%
TOTAL ASSETS 16,14,510.4 20,64,383.0 27,55,041.3 29,19,865.9
Net Income 9.1% 16.2%
Capital 65,264.6 93,804.6 1,18,804.6 1,18,804.6 PAT 6.9% 49.2%
Reserves and Surplus 1,37,978.2 1,54,858.4 1,84,192.9 1,98,065.1
Provisions 108.4 118.0 138.0 93.0
Borrowings 13,40,055.3 17,39,326.8 23,43,767.2 24,53,493.2
Other liabilities and provisions 71,103.9 76,275.3 1,08,138.5 1,49,410.1
TOTAL CAPITAL AND
16,14,510.4 20,64,383.0 27,55,041.3 29,19,865.9
LIABILITIES…...……
Source: Choice Broking Research, RHP
© CHOICE INSTITUTIONAL RESEARCHEquity Research Team
Name Designation Email id
Sundar Sanmukhanis Head of Research - Fundamental sanmukhanis@choiceindia.com
Satish Kumar Research Analyst satish.kumar@choiceindia.com
Rajnath Yadav Research Analyst rajnath.yadav@choiceindia.com
Ankit Pareek Research Associate ankit.pareek@choiceindia.com
Yug Tibrewal Research Intern
Disclaimer
es
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Firm interest of the stock / Instrument (s): - No.
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