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Friday, 15 January 2021
CM RATING 53/100

Indian Railway Finance Corporation

Dedicated financier to Railways with low risk business model

With strong AUM growth and nil NPAs, company plays a strategic role in financing growth of Indian Railways with better long-term prospects

Indian Railway Finance Corporation (IRFC), incorporated on 12 December 1986, is the dedicated market borrowing arm of the Indian Railways with the primary business of financing the acquisition of rolling stock assets, which includes both powered and unpowered vehicles such as locomotives, coaches, wagons, trucks, flats, electric multiple units, containers, cranes, trollies of all kinds and other items of rolling stock components as enumerated in the Standard Lease Agreement. The company is also in the business of leasing railway infrastructure assets and national projects of the Government of India and lending to other entities under the Ministry of Railways.

The company is a NBFC (Systemically Important), registered with the Reserve Bank of India, and classified under the category of an Infrastructure Finance Company. The company is notified as a Public Financial Institution.

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 or capital expenditure. The company financed Rs 71392 crore accounting for 48.22% of the actual capital expenditure of the Indian Railways in FY2020.

Amitabh Banerjee is the Chairman and Managing Director of the Company and is an officer of the Indian Railways Accounts Service (1988 batch). He has prior experience in the fields of finance, accounts, and general administration.

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. 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 weighted average cost of incremental borrowing and a margin determined by the Railways in consultation with the company at the end of each Fiscal. A nominal amount of Rs 1 lakh per annum shall be payable for the second 15-year period or until the Rolling Stock Assets are sold out to the Railways or any other buyer before the completion of the lease period.

The company also intends to follow a leasing model for Project Assets with lease periods of 15 to 30 years depending on the mode of raising funds for such leasing. In addition to providing financing support for the Railways and other entities administered by the Railways, the company also plans to diversify financing portfolio to include forward and backward linkages for the railways sector. It believes that such core infrastructure focused businesses will benefit from the significant investment proposed by the GoI and various state governments as well as by the private sector.

The company has recorded strong 26% CAGR growth in Assets under Management during the last two and half years to Rs 278008 crore end September 2020, of which 55.34% is lease receivables primarily in relation to Rolling Stock Assets, 2.25% is loans to central public sector enterprises entities under Railways and 42.41% is advances against leasing of Project Assets. In FYs 2017, 2018, 2019 and 2020, the company was responsible for financing 72%, 93%, 84% and 76%, respectively, of the rolling stock purchased by the company and leased to the Railways.

At the beginning of each fiscal, the Railways provides the target fund requirement based on its planned capital expenditure, which is met by raising funds through various sources including the issue of taxable and tax-free bonds in India, term loans from banks/ financial institutions, external commercial borrowings including bonds and syndicated loans, internal accruals, asset securitization and lease financing.

For FY2021, the Railways has revised the target of funds to be borrowed from IRFC to Rs 62567 crore from Rs 58000 crore earlier, including Rs 33137 crore for rolling stock, Rs 1430 crore for projects being executed by RVNL and Rs 28000 crore for projects under Extra Budgetary Resources-Institutional Financing (EBR-IF). In addition, the Railways has further indicated its intention to additionally borrow Rs 53000 crore from the Company in FY2021 and it will be informed after the necessary approvals are obtained.

In FY2020, the company was entitled to a margin of 40 bps over the weighted average cost of incremental borrowing for financing Rolling Stock Assets and a spread of 35 bps over the weighted average cost of incremental borrowing for financing Project Assets.

The company has posted healthy 21% CAGR growth in total revenue to Rs 13421.09 crore in FY2020 from FY2018 and further posted 12% growth for H1 of FY2021. The net profit of the company recorded CAGR of 26% to Rs 13192.10 crore in FY2020 from FY2018. The net profit improved 16% to Rs 1886.84 crore in H1 of FY2021.

The capital adequacy ratio was robust at 433.92% end September 2020. The non-performing assets have been nil, while it maintains the highest possible credit ratings for an Indian issuer both for domestic and international borrowings.

Objects of the Offer

The initial public offer (IPO) consists of fresh issue of 118.80 crore shares amounting to Rs 2970 crore at lower price band of Rs 25 band of Rs 3089 crore at the upper band of Rs 26 per share.

Further, the offer of sale comprises 59.40 crore shares aggregating up to Rs 1485 crore at lower price band and Rs 1544 crore at upper price band.

The issue is to be made through the book-building process and will open on 18 January 2021 and will close on 20 January 2021.

The company proposes to utilize the net proceeds from the offer for augmenting equity capital base to meet future capital requirements arising out of growth in business.

In addition, the company expects to achieve the benefits of listing of Equity Shares on the Stock Exchanges and enhancement of the company’s brand name and creation of a public market for Equity Shares in India.

Strengths

The company has played a strategic role in financing the growth and operations of the Indian Railways, while the extensive expansion plans of the Indian Railways in the future will involve significant financing further boosting the operations of the company.

The diversified sources of funding, credit ratings and strategic relationship with the Railways, have enabled the company to keep its cost of borrowing competitive. The cost of borrowings was 6.82% in FY 2018, 7.09% in FY 2019 and 7.27% FY 2020, while it was 7.1% in H1 of FY2021.

Being an NBFC classified as Infrastructure Finance Company, the company can raise external commercial borrowings of up to US$ 750 million or equivalent per financial year under the automatic route without the prior approval of the RBI, subject to compliance with parameters and other terms and conditions

The company has exhibited consistent financial performance in terms of funding and profitability. Since FY1991, the company has consistently made dividend distributions. Its cost-plus based Standard Lease Agreement with the Railways has historically provided it with a margin over the weighted average cost of incremental borrowing.

Low overhead and administrative costs and high operational efficiency has resulted in increased profitability.

The relationship with the Railways has enabled the company to maintain a low risk profile. The company does not have any non-performing assets. Railways have historically never defaulted in its payment obligations under the Standard Lease Agreement. In addition, lease payments by the Railways form part of the annual railway budget in the Union Budget of India

The liquidity risk is also minimized as the Railways is required to cover any funding shortfall required by the company.

The expenses incurred by the company with respect to any foreign currency hedging costs and/ or losses (and gains, if any) as well as any hedging costs for interest rate fluctuations are built into the weighted average cost of incremental borrowing. Risks relating to damage to Rolling Stock Assets due to natural calamities and accidents are also passed on to the Railways. Further, the Railways is required to indemnify the company from and against any loss or seizure of the Rolling Stock Assets under distress, execution or other legal process.

Weaknesses

A significant amount of revenue is derived from the Indian Railways and a loss of or reduction in business from the Indian Railways, any direct borrowing by the Indian Railways or introduction of any new avenues of funding by the Railways could have an adverse effect on business.

Its business is dependent on the continued growth of the Indian railway sector and any slowdown in the growth of Indian Railways due to competition from other means of transport will impact business.

The ability of the company to operate efficiently is dependent on its ability to maintain diverse sources of funds at a low cost and any disruption in funding sources or any inability to raise funds at a low cost could have a material adverse effect on business.

Unfavorable margin on the Rolling Stock Assets leased to the Railways, which is decided in mutual discussion, may have an adverse impact on business.

The company may face liquidity risk if there is any mismatch in the tenor of leases and borrowings, while any change in the terms of the Standard Lease Agreement with Railways may also cause liquidity risk.

The 2015 MoU between Railways and LIC to avail Rs 1.5 lakh crore of long-term funding with IRFC as an intermediary ended in FY2020. Thus, the non-availability of funding from the LIC matching the long tenor requirements of the Indian Railways may affect the asset liability position.

The company is currently exempt from provisioning requirements of deferred tax assets or deferred tax liability, while withdrawal of the exemption may impact the profitability of the company.

Valuation

The annualized EPS on post-issue equity works out to Rs 2.9 (annualized) for H1FY2021. At the price band of Rs 25 to Rs 29, P/E is 8.7 to 9.0 times of H1FY2021 EPS.

Post-issue, the book value (BV) will be Rs 26.6 at the upper price band, while the adjusted BV (ABV) also stands at Rs 26.6 with nil non-performing assets.

The scrip is being offered at a price to Adj BV multiple of 0.98x at the upper price band.

Among peer public financial institutions and infrastructure finance companies, Power Finance Corporation (PFC) is trading P/Adj BV multiple of 0.84x, Rural Electrification Corporation (REC) at P/Adj BV of 0.85x and Housing and Urban Development Corporation Ltd (HUDCO) at P/Adj BV multiple of 0.76x.

In terms of P/E, IRFC is offered at 9.0x, while PFC is trading at P/E of 4.2x, REC at 3.5x and HUDCO at 7.0x.

IRFC is offered at a slightly higher premium to other peers. However, IRFC has exhibited strong performance over peers in terms of AUM growth, cost of borrowings, the cost-to-income ratio and asset quality. The company also has a unique low risk business model and plays a strategic role in financing growth of Indian Railways with better long-term prospects considering government investments and further expansion of railway network. The company also plans to diversify the financing portfolio to include forward and backward linkages for railways sector

Earlier, four Railway companies, namely Indian Railways Catering and Tourism Corporation, Rail Vikas Nigam Limited, Ircon International and Rites, listed on the exchanges in 2018 and 2019 have received a strong response from the markets.

Post issue, the government shareholding in the company is reducing to 86.4%. The government is likely to continue to disinvest in tranches in future to raise funds for itself, keeping the scrip under constant pressure. Further offloading of shareholding by the government in the company may have an impact on the cost of borrowings and special benefits enjoyed by the company. Also, the company has been generating moderate RoE of 10-12% for the last three years, mainly on account of higher equity capital infusion by the government through rights issue. 

Indian Railway Finance Corporation : Issue highlights

For Fresh Issue Offer size (in Rs crore)
- On lower price band 2970
- On upper price band 3089
Offer size (in no of shares crore) 118.80
For Offer for Sale Offer size (in Rs crore)
- On lower price band 1485
- On upper price band 1544
Offer size (in no of shares crore) 59.40
Price band (Rs)* 25-26
Minimum Bid Lot (in no. of shares ) 575
Post issue capital (Rs crore)
- On lower price band 13068.51
- On upper price band 13068.51
Post-issue promoter & Group shareholding (%) 86.4
Issue open date 18-01-2021
Issue closed date 20-01-2021
Listing BSE, NSE
Rating 53/100

 

Indian Railway Finance Corporation: Financials

  1803 (12) 1903 (12) 2003 (12) 1909 (6) 2009 (6)
Income from operations 9206.97 10987.35 13421.02 6574.77 7383.12
Other Income 0.87 0.00 0.07 2.12 1.71
Total Income 9207.84 10987.36 13421.09 6576.89 7384.83
Interest Expenses 6637.59 8183.06 10162.66 4937.32 5440.98
Other expenses 37.96 20.99 63.73 8.96 56.77
Gross profit 2532.30 2783.31 3194.70 1630.61 1887.08
Depreciation 0.35 0.42 0.46 0.22 0.23
Provisions 0.00 27.54 2.14 0.00 0.00
Profit before tax 2531.94 2755.34 3192.10 1630.39 1886.84
Provision for tax 530.48 615.41 0.00 0.00 0.00
Net profit 2001.46 2139.93 3192.10 1630.39 1886.84
EPS*(Rs) 1.5 1.6 2.4 2.5 2.9
*EPS is on post issue equity capital of Rs 13068.51 crore of face value of Rs 10 each
Figures in Rs crore
Source: IRFC Issue Prospectus