Indian Railway Finance Corporation (IRFC) ‘s three-day Initial Public Offer (IPO) will open today and expire on Wednesday, January 20. With the aim of raising an estimated Rs 4,633.4 crore, at the top end of the price list, at Rs 25-26, the state-owned unit seeks to allocate funds to increase the company’s equity capital base to meet the future growth needs of the business; And towards meeting common corporate objectives.
According to the proposal, the government (which currently owns 100 per cent) will execute a sale offer (OFS) for approximately 594 million shares valued at Rs 1,480 crore. After the IPO, the share of the center will drop to 86.4 per cent. Additionally, the issue includes a new issue of 1,188 million shares, totaling a total of Rs 2,970 crore.
Investors can apply for this issue in 575 shares and multiples thereof. This offer is reserved for eligible corporate buyers with 50% off; 15 per cent for non-institutional investors; And 35 per cent for retail individual investors. It should be noted that 5 million equity shares are reserved for employees of the firm.
Monopoly: Incorporated in 1986, IRFC is dedicated to the acquisition of rolling stock assets (wagons, trucks, electric multiple units, locomotives, bogies), leasing of railway infrastructure assets and lending to firms under the Ministry of Railways. (MoR), expansion plans and asset management.
According to Sherkhan’s IPO note, the IRFC is worth Rs 71,392 crore. The money was financed, which accounted for 48.22 per cent of Indian Railways’ actual capital expenditure in FY20. In FY18, FY19, FY20 and H1FY21, the IRFC is worth Rs 18,669.8 crore, Rs 24,055 crore, Rs 33,544.1 crore, and Rs 10,816.3 crore.
“We believe that the future expansion plans of Indian Railways will involve significant financing, and that operations will significantly increase as the primary source of financing for Indian Railways,” it said in its note.
Healthy Economy: IRFC’s total revenues increased at a compound annual growth rate (CAGR) of 19 per cent during FY17-20, driven by strong growth in AUM (25 per cent CAGR). Its net profit was up 26.3 per cent to Rs 3,192.1 crore, compared to ROE’s 11.6 per cent in FY20.
Moreover, it has earnings ratio of 2.94% and NIM of 1.38. At the end of Q2 FY21, its return ratios were 1.32 / 12.18 per cent for ROA / ROE. In addition, it has a Tier-I portfolio of 434 per cent of total risk-weighted assets and is paying dividends consistently with FY20 payments at 5.33 per cent.
Strong Credit Rating: IRFC can obtain external commercial loans in the form of syndicated foreign currency term loans, issuance of bonds / notes in offshore markets at competitive rates. It is classified as an “Infrastructure Finance Company” and is allowed to borrow up to 750 750 million from the ECBs without prior approval from the RBI.
Also, it has the highest 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: According to the terms of the contract with MOR, the risks of property damage due to natural disasters and accidents are forwarded to the Ministry of Railways. In addition, MoR is required to “indemnify the Company” from and against any loss or confiscation of Rolling Stock assets under difficulty, execution or other legal process.
“Moreover, the risk associated with foreign currency hedging costs or interest rate fluctuating hedging costs is built on weighted average debt cost (WACB), in which IRFC earns margin as determined by the MRR.
Growth Outlook: IRFC is expected to remain a major beneficiary amid Indian railway expansion and transformation plans. Indian Railways has proposed the highest investment of Rs 1.61 trillion in FY21. In addition, FY18 plans to increase the doubling of the rails to 9.5 km per day.
Analysts say that with the expansion of the freight network and passenger demand, the need for a rolling stock to boost IRFC’s business will increase significantly.
Inexpensive valuation: In the high price band, LKP Securities values the shares at 1 (x) FY20P / BVPS.
“There are no comparable peer companies operating in the business space like IRFC. However, compared to other PSU NBFCs, IRFC stands separately with Nil NPAs but with lower (though stable) margins. As a receiving body, IRFC has the highest credit rating possible for Indian distributors on both domestic and international loans, ”Sheikhan said in a note.
Verdict: attractive valuations, healthy earnings ratios, strong growth prospects, relatively low-risk business model, role of financial strategy for Indian Railways growth, and long-term prospects of electrification and network expansion make analysts optimistic about long-term future.