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Incorporated in 1986, Indian Railway Finance Corporation Limited (IRFC) is a dedicated market borrowing arm of Indian Railways. Their 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, containers, cranes, trollies of all kinds and other items of rolling stock components, leasing of railway infrastructure assets and national projects of the Government of India (GoI) and lending to other entities under the Ministry of Railways, GoI.

Positives: (a) Strategic role in financing growth of Indian Railways (b) Competitive cost of borrowings based on strong credit ratings in India and diversified sources of funding (c) Consistent financial performance and cost plus model (d) Low risk business model along with strong asset-liability management.

Investment concerns: (a) Company derives a significant amount of their revenue from operations from the Indian Railways. 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 Ministry of Railways, Government of India could have an adverse effect on their business. (b) Their business is dependent on the continued growth of the Indian railway sector, making them susceptible to the GoI initiatives to modernize the railways and other policies. (c) Disruption in their funding sources or any inability to raise funds at a low cost

Outlook & Valuation: IRFC has posted strong growth in operating income of 20.7% CAGR between FY18-20 while net profits have grown at a CAGR of 26.3% during the same period. Company is unlikely to face any asset quality issues given the fact that the company caters to the Government of India. At the higher end of the price band the stock would be trading at P/BV of 1.0x fully diluted post issue book value of `26.6 per share. We expect the company to post strong growth driven by capex by Indian railways along with stable margins due to cost plus model. Given the growth prospects, we recommend a SUBSCRIBE rating on the issue.

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