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BACKGROUND

IRFC is a dedicated market borrowing arm of the Indian Railways. Its primary business is the acquisition and leasing of Rolling Stock Assets and Project Assets. IRFC is not only a proxy play on the capex boom in Indian Railways but also forms a core source of funding having a contribution of 48% of the total funding for Indian Railways. IRFC is entitled to a fixed margin over and above its cost of capital which makes the business model highly predictable with negligible risks.

Details and Objects of the Issue The public issue consists of –

(i) Offer for sale of Rs. 1,544 Cr by the Government of India and

(ii) Fresh issue of Rs. 3,089 Cr to augment Tier 1 capital for future growth. Post the IPO, GOI’s stake in IRFC would stand reduced from 100.0% to 86.4%

Investment Rationale

* Proxy play on Indian Railways’ strong growth

* Stable cost-plus model leads to consistent return ratios

* Low risk, high growth business model with a proven track record

Valuation and Recommendation

IRFC is a proxy play on the strong capex growth in Railways which has witnessed a considerable pickup post FY15 as the NDA Government accelerated the overall infrastructure spending including Railways. Railway capex witnessed a growth of 20% CAGR post FY15 compared to 14% CAGR in the preceding ten years. Also, stable cost-plus business model makes IRFC a low risk (nil NPA), low return (11-12% ROE) company. Upon comparing IRFC with other PSU NBFCs having exposure to infrastructure sectors, we observe that IRFC has a marginally lower ROE which is compensated by higher growth; although valuations appear to be higher than peers. We believe IRFC is fairly priced at Rs. 26 and has limited scope for any meaningful upside. We rate the issue as ‘Neutral’.

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