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Low risk business model with Strong asset-liability management …

Indian Railway Finance Corporation Limited (IRFC), wholly-owned by the Government of India, is the dedicated market borrowing arm of the Indian Railways. Incorporated in 1986, it follows a financial leasing model to finance the acquisition of rolling stock assets, which includes locomotives, coaches, wagons, trucks, flats, electric multiple units, containers, cranes, trollies etc. IRFC is also into 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 (“MoR”).

* IRFC follows a low risk business model with a margin determined by the MoR at the end of each Fiscal year.

* In FY20, IRFC was entitled a margin of 40 bps over the weighted average cost of incremental borrowing for financing Rolling Stock Assets.

* In FY20, IRFC financed Rs713.92 billion accounting for 48.22% of the actual capital expenditure of the Indian Railways. For FY21, MoR is expected to borrow Rs.1155.67 billion.

* IRFC’s AUM represents sum of total lease receivables (55.34%), loans to Other PSU Entities (2.25%), and advances against leasing of Project Assets (42.41%), and has grown by 80% to Rs.278007.6cr from March 31, 2018 to September 30, 2020.

* It enjoys the benefit of competitive cost of borrowings based on strong credit ratings and diversified sources of earning.

* For FY18-20, revenue grew at a CAGR of 21% while PAT grew by 26% CAGR. In FY20, IRFC reported PAT of Rs.3,192cr on revenue of Rs.13, 421cr.

* In FY17, 18, 19 and 20, IRFC financed 72%, 93%, 84% and 76%, respectively, of the rolling stock purchased by it and leased to the MoR.

* From April 1, 2017 to September 30, 2020, IRFC financed Rs. 1.79 trillion to the Indian Railways.

* At the upper price band of Rs.26, IRFC is available at a P/E of 9x and P/B of 1.1x on an annualized basis, which appears attractive. Considering the extensive expansion plans of the Indian Railways, monopoly in the business, a low risk business model and stable RoE, we assign a Subscribe rating for the issue.

Purpose of IPO

The offer comprises of fresh issue and offer for sale. The proceeds of the offer for sale shall be received by the selling shareholders. The net proceeds of the fresh issue will be utilized for augmenting the equity capital base to meet the future capital requirements in the business and general corporate purposes.

Key Risks

* Any downgrade in its credit ratings or India’s debt rating could increase finance costs.

* Changes in government policies.

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