The three-day initial public offer (IPO) of Indian Railway Finance Corporation (IRFC) will open today, and can culminate on Wednesday, January 20. With an aim to boost approximately Rs 4,633.4 crore, at the upper end of the worth band of Rs 25-26 apiece, the state-owned entity wishes to deploy the funds towards augmenting the company’s equity capital base to satisfy business future growth requirements; and towards meeting general corporate purposes.
According to the offer, the govt (which currently holds 100 per cent stake) will execute a suggestion purchasable (OFS) for about 594 million shares worth Rs 1,480 crore. Post IPO, Centre’s stake will come right down to 86.4 per cent. Additionally, the difficulty comprises of fresh issue of 1,188 million shares, aggregating to around Rs 2,970 crore.
Investors can apply for the difficulty in many 575 shares, and in multiples thereof. The offer is 50 per cent reserved for Qualified Institutional Buyers; 15 per cent for Non-Institutional Investors; and 35 per cent for Retail Individual Investors. It must be noted that 5 million equity shares are reserved for the firm’s employees.
Here’s why you ought to subscribe the issue:
Monopoly: Incorporated in 1986, IRFC may be a dedicated government entity engaged in financing the acquisition of wheeled vehicle assets (wagons, trucks, electric multiple units, locomotives, coaches), leasing of railway infrastructure assets, and lending to entities under the Ministry of Railways (MoR), expansion plans, and asset management.
As per an IPO note by Sharekhan, IRFC financed an amount of Rs 71,392 crore, accounting for 48.22 per cent of the particular cost of the Indian Railways in FY20. In FY18, FY19, FY20, and in H1FY21, IRFC financed wheeled vehicle assets worth Rs 18,669.8 crore, Rs 24,055 crore, Rs 33,544.1 crore, and Rs 10,816.3 crore, respectively.
“We believe that the Indian Railways’ extensive future expansion plans will involve significant financing and that we believe that operations, as a primary financing source for the Indian Railways, will increase significantly,” it said in its note.
Healthy financial position: IRFC’s overall revenues grew at a compounded annual rate of growth (CAGR) of 19 per cent during FY17-20, driven by strong growth in AAUM (25 per cent CAGR). Its net income grew by a CAGR of 26.3 per cent to Rs 3,192.1 crore during FY18-20 while RoE stood at 11.6 per cent in FY20.
Moreover, it’s cost to income ratio of two .94 per cent with NIM of 1.38 per cent. At the top of Q2FY21, its return ratios stood at 1.32 per cent/12.18 per cent for ROA/ROE. Furthermore, it’s tier – 1 capital of 434 per cent of total risk weighted assets and has been consistently paying dividend with FY20 payout at 5.33 per cent.
Strong credit rating: IRFC can source external commercial borrowings within the sort of syndicated foreign currency term loans, issuance of bonds/ notes in offshore markets at competitive rates. it’s categorized as an “Infrastructure Finance Company” and is allowed to borrow up to $750 million from ECBs without prior approval from RBI.
Also, it’s received the very best credit ratings from CRISIL – ‘CRISIL AAA’ and ‘CRISIL A1+’; ICRA – ‘ICRA AAA’ and ‘ICRA A1+’; and CARE – ‘CARE AAA’ and ‘CARE A1+’.
Low business-risk: As per its terms of agreement with the MoR, risks concerning damage to wheeled vehicle assets, thanks to natural calamities and accidents, are passed on to the Railways ministry. Further, the MoR is required to “indemnify the company” in the least times from and against any loss or seizure of the wheeled vehicle assets under distress, execution or other legal process.
“That apart, risk associated with foreign currency hedging cost or hedging cost for rate of interest fluctuation are built into weighted monetary value of borrowing (WACB) of which IRFC earns a margin as determined by MoR. Even, lease payments by MoR form a part of the annual railway budget within the Union Budget of India,” said a report by Choice Broking.
Growth outlook: Amid the continued expansion and transformation plans of the Indian Railways, IRFC is predicted to stay a serious beneficiary. The Indian Railways proposed highest-ever capital outlay worth Rs 1.61 trillion in FY21 compared with Rs 1.48 trillion in FY20. Besides, it also planned to extend the doubling of tracks to 9.5 km per day in FY18 to succeed in 19 km per day in FY22.
With the expansion of the freight network and passengers demand, the need of wheeled vehicle will increase substantially thereby to supply boost to IRFC’s business, say analysts.
Inexpensive valuation: At higher price band, LKP Securities values the stock at 1(x) FY20 P/BVPS.
“There are not any comparable peer companies which operate during a business space almost like that of IRFC. However, relative to other PSU NBFCs, IRFC stands apart with nil NPAs but lower (albeit stable) margins. On a diluted basis at the upper price band, IRFC is valued at 1x FY20 BVPS. However, being the dedicated market borrowing arm for the Indian Railways, IRFC enjoys the very best possible credit ratings for an Indian issuer both for domestic and international borrowings,” said a note by Sharekhan.
Verdict: Attractive valuation, healthy return-ratios, expectations to post strong growth, relatively low risk business model, strategic role in financing growth of Indian Railways, and future prospects considering electrification and network expansion make analysts optimistic on the long-term prospects for IRFC.
This article was taken reference from business-standard
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