IRFC IPO Review: ICICI Securities on Indian Railway Finance Corporation issue

IRFC IPO Review: Indian Railway Finance Corporation (IRFC) is the dedicated market borrowing arm of the Indian Railways. The company registered with the RBI as a NBFC and is classified under the category of an “Infrastructure Finance Company”. The primary business is financing the acquisition of rolling stock assets, which includes both powered and unpowered vehicles, as enumerated in the Standard Lease Agreement, leasing of railway infrastructure assets and national projects of the Government of India, and lending to other entities under the Ministry of Railways, Government of India.
 
In FY20, IRFC had financed 76% of the rolling stock purchased and leased to the MoR (Ministry of Railways). IRFC’s total revenue from operations increased by 19.3% from Rs 9208 cr in FY18 to Rs 10987 cr in FY19 and by 22.2% to Rs 13422 cr in FY20, and was Rs 7385 cr in first half of FY21. In FY18, FY19, FY20, and first half of FY21, net profit stood at Rs 2001 cr, Rs 2139 cr, Rs 3192 cr and ₹1887 cr, respectively.
 
Investment Rationale:
 
Strategic role in financing growth of Indian Railways:
 
IRFC is a dedicated market borrowing arm for the Indian Railways and has played a strategic role in financing the operations of the Indian Railways. In FY20, IRFC financed ₹71,392 crore, accounting for 48.2% of the actual capital expenditure of the Indian Railways. In FY18, FY19, FY20, and first half of FY21, it financed Rolling Stock Assets worth Rs 18670 cr, Rs 24055 cr, Rs 33544 cr and Rs 10816 cr, respectively. The extensive expansion plans of the Indian Railways in the future will involve significant financing, and as a primary financing source for the Indian Railways, the company’s operations will increase significantly. The financing targets are determined annually by the MoR (Ministry of Railways) based on the annual planned capital outlay contained in the Union Budget of India for Indian Railways Strong distribution network.
 
Priced at P/BV of 1x H1FY21 (post issue) on upper band:
 
As a dedicated finance arm of Indian Railways, IRFC remains a low risk model with no non-performing assets and RoE at 11-12%. At the higher end of the price band of Rs26 per share, the stock is available at a P/B of 1x on H1FY21 BV.