IRFC IPO

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(i) Indian Railway Finance Corporation is basically an NBFC that finances Indian Railways for the acquisition of assets, which includes both powered and unpowered vehicles, for example, locomotives, coaches, wagons, trucks, flats, electric multiple units, containers, cranes, trollies of all kinds. Apart from this they also help Indian Railways for leasing of railway infrastructure assets and national projects of the Government of India (collectively, “Project Assets”) and lending to other entities under the Ministry of Railways, Government of India (“MoR”).

(ii) In short, the Ministry of Railways is responsible for the procurement of Assets and for the improvement, expansion, and maintenance of Project Assets. IRFC is responsible for raising the finance necessary for such activities.

(iii) IRFC is wholly-owned by the Government of India acting through the MoR and is registered with the Reserve Bank of India as an NBFC (Systematically Important) and are classified under the category of an “Infrastructure Finance Company” under Section 45-IA of the Reserve Bank of India Act, 1934.

(iv) IRFC Operations

a) Leasing- They basically purchased Indian railways assets and then provide them on lease to the Ministry of Railways. The lease period is typical of the duration of 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 borrowing and a margin determined by the MOR in consultation with us at the end of each Fiscal.

The total value of Rolling Stock Assets financed by IRFC as of March 31, 2019, was 1,94,044 Crores.

b) Lending- 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.

In FY2020, the MoR has provided targets for market borrowings from IRFC for funding of Rolling Stock Assets and Project Assets, which includes financing of 28,400 Crores for Rolling Stock Assets and financing of 631 Crores for project assets being executed by RVNL and financing 26,440 Crores for Project Assets through institutional finance.

How IRFC makes money?

a) In FY2019, the Cost-plus based Standard Lease Agreement with the MoR has a margin of 40 bps over the weighted average cost of borrowing for financing Rolling Stock Assets and a margin of 35 bps over the weighted average cost of borrowing for financing Project Assets.

b) In the cost-plus pricing model for financing to Other PSU Entities, which typically provide for a relatively higher margin. IRFC has maintained an average net interest margin of 1.79% from Fiscal 2017 through Fiscal 2019.

Cost of borrowings and Credit Rating for IRFC?

The Cost of Borrowings in Fiscals 2017, 2018, and 2019 was 6.97%, 6.82%, and 7.09%, respectively. They have 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+.

Objects of the IRFC IPO:

The Offer for Sale (3088 Crores) The proceeds of the Offer for Sale shall be received by the Selling Shareholder only and the Company will not receive any proceeds from the Offer for Sale. Objects of the Fresh Issue (1544 Crores) The Net Proceeds are proposed to be utilized towards the funding of the following objects: (1) Augmenting our equity capital base to meet the future capital requirements arising out of growth in our business. (2) General corporate purposes
DRHP of IRFC IPO
RHP of IRFC IPO

IRFC IPO Details:

Open Date: Jan 18 2021
Close Date: Jan 20 2021
Total Shares: 1,782,069,000
Face Value: ₹ 10 Per Equity Share
Issue Type: Book building
Issue Size: 4633 Cr.
Lot Size: 575 Shares
Issue Price: ₹ 25-26 Per Equity Share
Listing At: NSE,BSE
Listing Date: Jan 29 2021

Promoters And Management:

(i) Manjula Rangarajan is the Part-time Chairperson of the Board of the Company. She holds a master’s degree in sociology from the University of Madras. She is an officer of the Indian Railway Accounts Service. She currently serves as the financial commissioner (railways), alongside the position of additional member (finance) and additional member (budget) with the Railway Board. (ii) Amitabh Banerjee is the Managing Director of the Company. He holds a bachelor’s degree in commerce from the University of Delhi and a master’s degree in commerce from the University of Delhi and is also a fellow member of the Institute of Cost Accountants of India. He is an employee of the Indian Railways Accounts Service. In the past, he has been associated with Konkan Railway Corporation Limited as well as the Hindustan Paper Corporation Limited in the capacity of the director (finance).

Financials of IRFC IPO:

Particulars(in Crores) Mar-17 Mar-18 Mar-19 Mar-20 Sep-19 Sep-20
Interest Income 514 988 1,721 2,748 1,403 1,717
Dividend Income 0.4 0.4 0.5 0.6 - 0.2
Lease Income 7498 8278 9410 10672 5171 5666
Finance Cost 5873 6637 8183 10163 4937 5441
Employee Benefit Expense 3 6 6 6 2 2
Net Profit 944 2081 2296 3192 1630 1887
Shares 652.6 652.64 938 1188 938 1188
EPS 1.45 3.19 2.45 2.69 1.74 1.59
Book Value 18 21 20 26 28 27
IZ Review 1. IRFC has shown 18% growth in revenue and 50% growth in PAT from FY17 to FY20. 2. As it is a lending arm to Indian Railways and to some PSU, the employees required are less and therefore, the employees cost is low. 3. The book value as on 30.09.2020 stands at 27. This shows pre-IPO valuation is below 1x (undervalued).

Comparison With Peers:

There are no listed entities similar to our line of business and operating profile.

Recommendation on IRFC IPO:

Review and Recommendation of InvestorZone are 5/10 Pros 1. Government PSU which has shown excellent growth in revenue. The government focus on Indian Railways projects such as Bullet Trains etc gives visibility of revenue for IRFC in future. 2. The P/B of ~1x, at which IRFC is offering shares is under-valued. 3. 15-20% listing gain is expected. Cons 1. The entire revenue of ~100% is dependent of Railways projects. As government is slowly moving the Railways projects into PPP(Public Private Partnership) models, then this will have a dampening effect on revenues of IRFC going forward. 2. The Indian Railways faces significant competition in the transport sector from other means of transportation such as transport by road, sea and air. While the Indian Railways continuously looks to augment its infrastructure and undertake other necessary improvements to the railway network, competition in freight traffic from the road sector is likely to intensify further, as present projects for upgrading road networks are completed. Fact check: IRFC is dependent on Indian Railways and Indian Railways 63% revenue comes from freight and 28% comes from passenger trains. So hampering of freight business will have significant impact on first on Indian Railways and then on IRFC.

Lead Manager of IRFC IPO:

  1. HSBC Securities & Capital Markets Private Limited
  2. ICICI Securities Limited
  3. SBI Capital Markets Limited

Registrar of IRFC IPO:

  1. Kfin Technology Private Limited

Discussion on IRFC IPO:

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