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IRFC – Bankrolling India’s Railway Infrastructure Development


Company Name – Indian Railway Finance Corporation Limited (IRFC)


Current Share Price – INR 48.6 (August 24, 2023)


Market Cap – INR 63,256 cr


 

1. What is interesting about the stock?

Since the first passenger train chugged out of Bombay in 1853, Indian Railways has gone on to employ over 12 lakh people and generate approximately INR 2.5 lakh crore annually. Not to forget the extraordinary scale of Indian Railways—its network spans around 93,000 route km! Undisputedly, the railway is a significant contributor to jobs, GDP, and mobility. But it continuously needs funds to grow.


Indian Railway Finance Corporation was formed in 1986 as a financial arm of Indian Railways, the government-owned national operator of the railway system in India. In January 2021, IRFC went public through an IPO and raised ~ INR 4,600 crore. The Government of India remains the majority shareholder in the Company (~86%) and they are looking to sell 11% to meet the SEBI requirements.


The Ministry of Railway's (MoR) extra-budgetary requirement is funded solely by IRFC, with the Government budgetary funds being the other source. IRFC maintains superior asset quality indicators and a low credit risk profile due to MoR being the sole counterparty to IRFC on its own and through other public sector undertakings like Ircon International Limited (IRCON) and Rail Vikas Nigam Limited (RVNL) under its direct purview. This has turned IRFC's loan book into a lucrative business that has consistently produced profits for many years and enabled it to pay dividends.


The IRFC is Indian Railways’ captive lender and the related guarantees it a steady revenue stream (and is also a major source of risk due to over-dependence on Indian Railways). The arrangement involves capital assets’ lease-rental model of rolling stock like wagons etc. as well as financing of large projects. The IRFC is allowed to charge a fixed interest margin (35-40 bps) over its weighted average cost of borrowing on loans it makes to the Railways.


It raises funds through bonds and bank loans in domestic and international markets. The high demand for IRFC bonds in the overseas markets has enabled it to borrow at favorable rates. For example, in the first half of 2021, it issued 20-year bonds at a coupon rate that was below what the Indian Government had offered to investors who purchased its bond.


Growth prospects of the IRFC book look strong in the future considering the amount of work that still needs to be done in the railway sector.


However, IRFC growth could face near-term challenges. IRFC disbursed INR 32,338 cr to MoR in FY23, down from INR 59,899 cr in FY22 and INR 1,04,369 cr in FY21. The Union Budget for 2023-24 has allocated minimal extra-budgetary resources to Indian Railways, indicating no borrowing for funding its capital expenditure. IRFC aims to diversify by financing entities with forward or backward linkage with Indian Railways and is establishing processes for the same.


Industry Overview


Indian Railways is investing in upgrading and expanding its infrastructure as the demand for rail transport grows. The upgrades include network electrification, modernizing stations, and gauge conversion. The expansion works include developing multiple dedicated freight corridors as the demand grows from businesses looking to transport bulky cargo through rail. The other projects include bullet trains for express passenger transportation. There is also a project to put solar panels on train rooftops to generate clean power.


Indian Railways plans to spend INR 2.4 lakh cr in FY24 to improve movement, safety, and infrastructure. This includes covering 3,000 km of tracks with ATP systems, long-term infra projects, more Vande Bharat trains, electrification of lines, and laying of new tracks.


Looking at the work ahead, the Railways will need more money for its various projects and it will be looking up to the IRFC for funding. IRFC issued its first green bond in 2017 and it will need to issue more such bonds to finance the Railways’ ambitious emissions reduction program.


Key competitive advantages of IRFC


The IRFC enjoys several competitive advantages as the financial arm of the Indian Railways. These include:

  • The IRFC has a ready market in the long term for its funds considering that the Railway's significant capex plans

  • The IRFC has built a solid profile in the global capital and credit markets. This enables it to borrow at favorable rates that in turn help keep its cost of funds down

  • If the IRFC is unable to meet its debt obligations, the Indian Government through the Ministry of Railways can step into the foot of the bill on its behalf (sovereign guarantee or put)

  • Indian Railways makes timely payments to the IRFC to ensure that the unit has enough resources to repay its debts and avoid defaults

2. Key Historical Financials

  • IRFC generated revenue of INR 13,421 cr in FY20 which has been rising steadily and reached INR 23,892 cr in FY23. Company revenue has been growing by more than 20% for the last 5 years.

  • IRFC had set out to disburse INR 66,500 cr in FY23. However, the actual disbursement in the year was less at INR 32,378 cr.

  • Profit growth has slowed down recently due to the higher cost of funding and lower than anticipated disbursement

  • ROA and ROE were quite healthy at 1.4% and 14.7% respectively in FY23

3. What is my view on company valuation?


Considering the projects that Indian Railways plans to undertake and the huge funding requirement they will need, IRFC still has plenty of growth opportunities ahead. The Company has delivered more than 21% revenue CAGR over the past 5 years. IRFC has the potential to continue delivering strong revenue growth given the growing demand for funding in the railway industry.


IRFC is currently trading at a price-to-book ratio of 1.35x and a TTM PE of 10.2x. Other PSU NBFC peers like PFC and REC trade at TTM PE of 4.2x and 5.5x respectively. Investors tend to assign discount valuation to public sector companies and single borrower risk, which may explain IRFC’s low PE ratio.


IRFC offers an ROE of 14.7% and a dividend yield of ~3%. IRFC looks good from a long-term perspective and should be evaluated by the investors. The sale by the Government of India shares could be a positive trigger for the near term with higher liquidity and improved sentiment for Railway stocks. IRFC share has jumped more than 100% in the last 1 year reducing the margin of safety.

4. What are the risks to the investment analysis?


IRFC is subject to several risk factors that could prevent it from delivering the kind of returns that investors anticipate. These include:

  • Higher budgetary support of MoR capex plans

  • Squeeze in the margin by Indian Railways (margin of 0.35-0.4% have been consistent for the last three years)

  • An increase in the costs of borrowing because of tight global capital markets could reduce IRFC’s profitability

  • A delay or slower-than-expected rollout of Indian Railways capital projects that require IRFC money could have unfavorable effects on the Company’s performance

  • Climate change effects could also deal a blow to IRFC. For example, extreme weather events that cause damage to Indian Railways’ infrastructure or hamper its operations could reduce demand for IRFC’s funds as projects stall or get postponed

 

About the Author


Stock market enthusiast.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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