Indian Railway Finance Corporation IPO closes today; issue subscribed 3.5 times, QIB portion booked 3.8 times

The Rs 4,633 crore public issue comprises of a fresh issue of Rs 3,088.9 crore and an offer for sale of Rs 1,544 crore by the Government of India through Ministry of Railways. The company raised Rs 1,390 crore through anchor book last week, at a higher end of the price band of Rs 25-26 per share.

Indian Railway Finance Corporation IPO opens: Should you subscribe?

IRFC's primary business is financing the acquisition of rolling stock assets, which includes both powered and unpowered vehicles. Over the last three decades, the company has played a significant role in supporting the capacity enhancement of the Indian Railways by financing a proportion of its annual plan outlay on the valuation front.

"At the upper price band, the company is valued at 10.6x P/E based on FY20 numbers considering the diluted equity shares. Company‘s strategic role in Indian Railways, strong revenue, improved margins and diversification of borrowing portfolio provides visibility over future growth prospects. Perhaps, it is the only public sector NBFC company to get listed," said BP Equities.

Indian Railway Finance Corporation IPO: 10 things to know about the issue

Moreover, "several high-speed rail corridor projects are expected to arrive in upcoming years which will create good opportunities for the company as a financing arm. Hence, we give a subscribe rating on this issue for medium to long term," the brokerage added.

IRFC will utilise fresh issue proceeds for augmenting the equity capital base to meet the future capital requirements arising out of growth in the business and general corporate purposes.

IRFC operates on an almost no-risk business model because of sovereign exposure. "Risk related to foreign currency hedging cost or hedging cost for interest rate fluctuation are built into the weighted average cost of borrowing (WACB) of which IRFC earns a margin as determined by Ministry of Railways. Even, lease payments by Ministry of Railways (MoR) form part of the annual railway budget in the Union Budget of India," said Choice Broking.

Further, as per the agreement, MoR will pay lease rental in advance in case of difficulties experienced by IRFC in debt servicing. Though, very low-risk profile with fixed spread over WACB also limits the NIM as well as return on equity (RoE) expansion. The company is assigned with AAA stable rating helping it to keep the cost of borrowing low.

As IRFC deals with MoR, the company has nil gross non-performing assets (NPA) as of first half of FY21. Capital adequacy ratio stood at 434 percent as no-risk weight attached to sovereign exposure.

"Valuation at P/BV of 1x looks attractive for long term conservative investors, considering strong profitability growth (CAGR of 26.3 percent during FY18-FY20), double-digit RoE at (annualized 12.2 percent in FY21) and low-risk profile of business with zero GNPA. Considering all these parameters, we assign subscribe rating to the issue," Choice Broking said.

IRFC reported a PAT growth at a CAGR of 26.3 percent during FY18-FY20 while RoE stood at a satisfactory level of 11.6 percent in FY20 considering the very low-risk profile of the business. "Management expressed confidence of sustain/gradually improve NIM and RoE with planned diversification of financing portfolio to include forward and backward linkages for railways sector," said the brokerage.