Indian Railway Finance Corporation IPO opens today: Should you subscribe?

"At the upper band of issue price, IRFC is priced at 1x FY20 P/ABV and around 0.9x H1FY21 P/ABV, which is an attractive valuation amongst its peers. We recommend subscribe. Between FY18 to FY20, its profits rose 34 percent, NII at 20 percent, pre-provision operating profit at 19 percent and assets under management (AUM) at 32 percent," said KR Choksey.

"The current business model and pricing structure is a low-risk model. The lower liquidity and credit risk is a positive differentiator. We don’t expect its position or the model to change adversely," the brokerage added.

"Whilst its business has a high concentration risk, the credit risk, liquidity risk and sovereign support is more favourable than its government owned peers, largely banks. Its rating is a AAA, higher than peers," said KR Choksey.

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

For any NBFC, credit rating holds utmost importance & company enjoys highest credit rating for an Indian issuer from ICRA, CRISIL & CARE. Company has received the highest credit ratings from CRISIL – AAA and A1+, ICRA – AAA and A1+, and CARE – AAA and A1+. It has also been accorded with Baa3 (Negative) rating by Moody's, BBB- (Stable) rating by Standard and Poor’s, BBB- (Negative) rating by Fitch and BBB+ (Stable) rating by Japanese Credit Rating Agency.

Also, company source funds from diversified avenues like taxable and tax-free bonds issuances, term loans from banks/financial institutions, ECB's, internal accruals, asset securitisation and lease financing in addition to equity infusion from time-to-time.

"Company is unlikely to face any asset quality issues given the fact that the company caters to the Government of India. 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," Angel Broking said.

The Union Budget of 2020 proposed a capital expenditure of Rs 1,60,200 crore for the Railways Ministry, highest-ever allocation for the Indian Railways. Of this 23 percent was towards rolling assets.

"While capital expenditure of the Indian Railways is likely to increase for network expansion, decongestion, safety; a large part of this is driven by PPP for new networks such as dedicated freight corridors (DFC). However, the decongestion and modernisation capex for the existing network is likely to continue to be driven internally. The railways continues to improve its freight transport as it contributes to 2/3rds of its revenues and has been losing share to road transportation. The funding for rolling assets is also likely to increase as network expands, and improved focus on decongestion," said KR Choksey.

IRFC's 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.

It is also in business of leasing of railway infrastructure assets and national projects of the Government of India (collectively, project assets) and lending to other entities under Ministry of Railways (MoR). MoR is responsible for the procurement of rolling stock assets and for the improvement, expansion and maintenance of project assets while IRFC is responsible for raising the finance necessary for such activities.

The company is registered with the Reserve Bank of India as a NBFC (systematically important) and are classified under the category of an 'Infrastructure Finance Company'.

"Although valuations are looking reasonable & we like the low risk & cost plus business model of company along with strong asset liability management but looking in terms of growth we find limited expansion both on margin front as well return on equity (ROE) front without any diversification & on zero risk portfolio basis," said Hem Securities.

"Therefore looking after strong business profile of company with limited growth aspect we give subscribe rating for long term. However in short term also, we are not expecting any major negative movement in stock prices after listing," the brokerage added.

The company is dedicated market borrowing arm for the Indian Railways & played a strategic role in financing the operations of Indian Railway; financed Rs 71,400 crore accounting 48.22 percent of the actual capital expenditure of the Indian Railways in FY20.

For Fiscal 2021, the MoR, through its letter dated April 10, 2020, indicated its intention to borrow Rs 58,000 crore from IRFC, however, subsequently, the MoR, through its letter dated January 7, 2021, has revised the said target to be borrowed from IRFC to Rs 62,567 crore for Fiscal 2021.

As the company funds to Ministry of Railways, the company maintains a low risk client profile with nil gross non-performing assets (GNPA). Also expenses incurred with respect to any foreign currency hedging costs or losses as well as gains along with hedging costs for interest rate fluctuations are built into the weighted average cost of incremental borrowing on which IRFC earns a margin as determined by the MoR. Therefore the company is working on low risk business & cost plus model, said Hem Securities.

Company has strong asset liability management which ensure minimum asset liability mismatch with matching of company’s tenure for advancing & borrowings. Also with the help of Standard Lease Agreement by MoR for any shortfall, of funds company is well placed to manage liquidity requirements, said the brokerage.

Company's AUM has grown at a CAGR of 27 percent since FY18 from Rs 1,54,534 crore to Rs 2,66,137 crore in FY20 while disbursements during the same year has grown at CAGR of 40 percent from Rs 36,722 crore to Rs 71,392 crore. Company has posted NIM of 1.59 percent in FY20 while ROE stands at 12 percent during the same year.

As of September 2020, the company's total AUM consisted of 55.34 percent of lease receivables primarily in relation to rolling stock assets, 2.25 percent of loans to central public sector enterprises entities under the administrative control of MoR (other PSU entities), and 42.41 percent of advances against leasing of project assets.

The company is adequately capitalized with Tier – 1 capital of 434 percent of total risk weighted assets. Furthermore, it is consistently paying dividend with FY20 payout at 5.33 percent. "Attractive valuation with healthy return ratios make us optimistic on the long term prospects for IRFC. We recommend subscribe for long term," said LKP Securities.

Ajcon Global feels IRFC is expected to enjoy premium post listing owing to its strategic role in financing growth of Indian Railways.

The company already raised Rs 1,390 crore from 31 anchor investors (including HDFC Trustee, Government of Singapore, Invesco India, Monetary Authority of Singapore, SBI Pension Fund, Kuwait Investment Authority, Goldman Sachs, BNP Paribas and Tata AIG) which instills confidence in the issue, the brokerage said.

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