Indian Railway Finance IPO review (May apply)

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Review By Dilip Davda on January 13, 2021

•    IRFC is a special purpose vehicle for railway infra development funding.
•    The company grows with sustained margins as indicated by financial data.
•    The issue is priced attractively despite being a solo player in the field.
•    For the first time Anchor Investors allocation is made by any PSU.
•    Investors' may consider an investment with a long term perspective.

ABOUT COMPANY:
Indian Railway Finance Corporation Ltd. (popularly known as IRFC) is the dedicated market borrowing arm of the Indian Railways. Its 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 as enumerated in the Standard Lease Agreement (collectively, 'Rolling Stock Assets'), 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, Government of India ('MoR'). The MoR is responsible for the procurement of Rolling Stock Assets and for the improvement,
expansion and maintenance of Project Assets.

IRFC is responsible for raising the finance necessary for such activities. Over the last three decades, it has played a significant role in supporting the capacity enhancement of the Indian Railways by financing a proportion of its annual plan outlay. The Union Budget proposed a capital expenditure of Rs. 1,610 billion for the Indian Railways for Fiscal 2021, which was higher than the capital expenditure of Rs. 1,480.64 billion in Fiscal 2020 (Source: Ministry of Railways).

The outlay for Fiscal 2021 comprises Rs. 702.50 billion from gross budgetary support, Rs. 75 billion from internal resources and Rs. 832.92 billion from extra-budgetary resources ('EBR'). (Source: Ministry of Railways) In Fiscal 2020, IRFC financed Rs. 713.92 billion accounting for 48.22% of the actual capital expenditure of the Indian Railways. It is wholly-owned by the Government of India acting through the MoR. It is registered with the Reserve Bank of India as an NBFC (Systematically Important) and is classified under the category of an 'Infrastructure Finance Company' under Section 45-IA of the Reserve Bank of India Act, 1934. It is notified as a 'Public Financial Institution' under the Companies Act, 1956 through a notification dated October 8, 1993, issued by the Ministry of Corporate Affairs.

The company follows a financial leasing model for financing the Rolling Stock Assets. The period of the lease with respect to Rolling Stock Assets typically 30 years comprises a primary period of 15 years followed by a secondary period of 15 years unless otherwise revised by mutual consent. In terms of the leasing arrangements, the principal amount pertaining to the leased assets is effectively payable during the primary 15 years lease period, along with the weighted average cost of incremental borrowing and a margin determined by the MOR in consultation with the company at the end of each Fiscal.

In Fiscals 2017, 2018, 2019 and 2020 (revised estimate), IRFC is responsible for financing 72%, 93%, 84% and 76%, respectively, of the rolling stock purchased by it and leased to the MoR (Source: Ministry of Railways).  As on September 30, 2020, the total value of Rolling Stock Assets financed by IRFC stands at Rs. 234627.17 cr. Since FY18, its AuM has posted growth of 27% CAGR.

IRFC is confident for its 'Future on Track' as it is providing financial assistance to the largest rail network in Asia.  Considering the highest ever allocation of budgetary funding for railways in the last budget, IRFC is providing an opportunity to invest in its journey to progress.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for augmenting equity capital base to meet future capital requirements out of planned growth, general corpus purpose, IRFC is coming out with its maiden IPO of Rs. 4455.17 cr. to Rs. 4633.38 cr. (based on lower and upper price band). The issues consist of 1188046000 fresh equity shares of Rs. 10 each and offer for sale of 594023000 equity shares. Thus the overall size of the issue is 1782069000 equity shares, that constitutes 15% of the post issue paid-up capital of the company. The company has fixed the price band of Rs. 25 - Rs.26 per share and minimum application are to be made for 575 shares and in multiples thereon, thereafter. The issue opens for subscription on January 18, 2021, and will close on January 20, 2021. Post allotment, shares will be listed on BSE and NSE.

The company has reserved equity shares worth Rs. 0.5 cr. for its eligible employees and from the residual portion; it has kept 50%for QIBs, 15% for HNIs and 35% for retail investors. For the first time, Anchor allocation is done by any PSU for its IPO, thus on this front IRFC is breaking the ice.

IRFC has raised entire equity at par value so far and thus the average cost of acquisition by selling stakeholders as well as other holders is Rs. 10 per share.

This issue is jointly lead managed by DAM Capital Advisors Ltd. (erstwhile known as IDFC Securities Ltd.), HSBC Securities and Capital Markets (India) Pvt. Ltd., ICICI Securities Ltd. and SBI Capital Markets Ltd. KFin Technologies Pvt.  Ltd. is the registrar to the issue.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, IRFC has posted total income/net profits of Rs. 9207.84 cr. / Rs. 2001.46 cr. (FY18), Rs. 10987.36 cr. / Rs. 2139.93 cr. (FY19), Rs. 13421.09 cr. / Rs. 3192.10 cr. (FY20). For the first six months ended on September 30, 2020, it has earned a net profit of Rs. 1886.84 cr. on total income of Rs. 7384.83 cr. Being a special purpose vehicle (SPV) of Railway Ministry in association with the Ministry of Finance, as this company get advance funding from Railways for its infra development, IRFC enjoys a sub-zero status in taxation.

For the last three fiscals, IRFC has reported an average EPS of Rs. 3.30 and an average RoNW of 11%. The issue is priced at a P/BV of 0.97 based on its NAV of Rs. 26.67 and at a P/BV of 0.98 based on post issue NAV of Rs. 26.61 (at the upper cap).

If we annualize FY21 first-half earnings and attribute it on fully diluted equity post IPO, then asking price is at a P/E of around 9, Thus the issue is priced attractively. As on September 30, 2021, it's paid-up equity capital of Rs. 11880.46 cr. is supported by free reserves of Rs. 19806.65 cr.

Post issue, its current paid-up equity capital of Rs. 11880.46 cr. will stand enhanced to Rs.13068.51. With the issue price at the upper cap, the company is looking for a market cap of Rs. 33978.12 cr.

IRFC has paid a dividend of Rs. 0.36, Rs. 0.48 and Rs. 0.21 per share for the last three fiscals respectively. For the first half of the current fiscal, it has already paid an interim dividend of 0.53 per share. Thus it is a dividend-paying company. It has been maintaining the margins with the growing business.

COMPARISION WITH LISTED PEERS:
As per offer documents, IRFC has no listed peers to compare with as it is a special purpose vehicle set up by Railway and Finance Ministry for funding requirements of railway infra projects.

BRLM's TRACK RECORDS:
The four merchant bankers associated with the issue have handled 22 issues in the past three fiscals, out of which 9 issues closed below the issue price on listing date.

IRFC IPO FAQs