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What Should You Know About the IRFC IPO?

Jan 20, 2021 2:49 AM 5 min read

The Indian Railway Finance Corporation (IRFC) opened for public issue today in an IPO valued at ₹4,633cr ($633.3m). The subscription was offered in the price band of ₹25-26 ($0.3) a piece. 

Couple of firsts were marked in this IPO. The first IPO of 2021 and the first IPO by a non-banking financial company (NBFC) in the public sector. The most striking character of the IPO, however, lies in it being related to the operation of the Indian Railways, the proverbial "growth engines" of the country's progress, as described by the Prime Minister. 

Due to the massive untapped potential lying in the railways, and the latest efforts of the Government launching into maximised economic lay up (to finance pandemic-induced ventures), the IPO seems to have hit at an opportune time. 

Let's spell out its particulars for you.

Company Profile

IRFC is a wholly-owned PSU that was incorporated in 1986. It is the bespoke market borrowing arm of the Indian Railways, meaning that it is tasked with raising funds for the Ministry of Railways (MoR) which would be expended in various ways such as:

  1. Procurement of rolling stock assets (wagons, trucks, electric multiple units, locomotives, coaches etc.).
  2. Expansion of the enterprises undertaken by the Railways.
  3. Leasing railway infrastructure assets and projects to other parties.
  4. Lending to other entities under the MoR.

There are primarily two kinds of business models IRFC follows. The first is through its leasing operations. Both the Rolling Stock Assets and Project Assets are leased by the company for a term ranging from 15 to 30 years. The second is through financing of Project Assets wherein IRFC requires leasehold interest in the asset and the MoR is required to pay rentals. The proceeds from these models jointly contribute to its finances. 


Key Features of the IPO

  • To be listed on both NSE and BSE.
  • Number of shares offered - 575 crores amounting to ₹4,633cr ($633.3m).
  • Fresh issue = ₹3,089cr ($422.5m) (118.8 crore shares of face value ₹10 each) + offer for sale = ₹1,544cr ($211.1m) (59.4 crore equity shares offered by the Government).
  • Issue size breakdown: 35% reserved for retail investors, 50% for QIBs and the rest for the non-institutional category .
  • A total of ₹1,399cr ($191.2m) was raised from 31 anchor investors before the IPO.

There is a certain repressed demand for IRFC's shares since the stock was commanding a grey market premium of 8% over the issue price band of ₹25-26 per share. Some analysts, however, attribute this to a clash with Indigo Paints' IPO and resulting diversion in investor interests.

For FY18-20, revenue grew at CAGR of 21% while PAT grew at 26% CAGR. The Capital Adequacy Ratio (CAR) as of September 2020 was 433.92%. Unlike most other PSUs, IRFC follows its own dividend policy and its payout ratio has increased from 3.57% in 2018 to 5.33% as at September 2020.


Business Studies

The President of India is the statutory promoter of IRFC and is expected to offload 13.6% stake in the company post-issue to bring the promoter shareholding to 86.4%. 

IRFC also boasts of possessing the highest credit ratings for an Indian issuer for domestic and international borrowings. It plays a crucial role in facilitating priority capex projects for the Railways. In FY20 alone, it financed ₹71,392cr ($9.7bn) (c. 48%) of the Railways' capital expenditure. 

As per the National Infrastructure Pipeline (NIP) task force, the projected annual capex for the national carrier is around ₹13.7Lcr ($187.3bn) which shows immense propensity for IRFC's growth. The low-risk and cost-plus business model of the company indicates positive asset valuations and management. 

Because of the nil-NPA presence in the IRFC's bag (thanks to its entire exposure to MoR which has historically never defaulted on payment obligations), assured returns of equity and expansion are likely. But, in the absence of diversification, margins on those returns are expected to be limited. 

Given the consistently substantial growth numbers, the IPO seems appropriately-priced and could emerge as a good bet for conservative long-term investors. Even in the short term, no imminent negative movement in stock prices are expected owing to the strong business profile and could therefore, be amenable for investors looking for short term listing gains.

The Indian Railways proposed its highest-ever capital outlay worth ₹1.61Lcr ($22bn) in FY21. Add to that its plans to systematically increase track networks by almost twice the pace from FY18 (9.5km per day) to FY22 (19km per day). With such ambitious expansion plans in the calling, the requirement of rolling stock amenities is bound to increase which will thereby increase IRFC's business. 


Key Risk Factors

RBI has exempted IRFC from the purview of its asset classification and other prudential norms. Also, IRFC is exempted from credit concentration norms to the extent of 100% of its exposure to Railway entities. Any change on the regulatory front may adversely affect the business, its financial condition and operational performance. 

Also, since the revenues of IRFC depend on the Railways, any change in the latter's capex strategy or policy could significantly impact earnings. For instance, the current drift of the Railways towards adoption of more and more PPP enterprises indicates its rising ability to raise its own funds (and extinguish the need for a dedicated commercial borrowings arm). 

Thirdly, any detrimental changes to working agreements or lack of support in raising funds more profitably (at lower rates etc.) amidst the pandemic-impacted economy could impact business operations as well. One also has to consider mounting competition from public and private sector commercial banks and other financial institutions which are keen on financing Railways and its affiliates at comparatively diminished rates. 

The high dependence on the Indian Railways (99% of its revenue generation) through lease and rental payments which have furnished its reserves till now could make IRFC susceptible to changing business equations, given any resulting consequent change in Government's policies. 

It is also worth mentioning that nine out of the 14 PSU IPOs launched since 2017 have failed to outperform benchmark indices so far. Although, on the bright side, Railway-related IPO such as those of IRCTC and Rail Vikas Nigam have bettered index returns since their launch. 

Having said that, given the present status of finances, positive credit outlook, stable margins and significant opportunities for growth, subscription in the IPO seems like a favourable venture. 


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