IRFC Ltd – Bankrolling India’s Railway Infrastructure Development

Updated: Jul 21


Company Name – Indian Railway Finance Corporation Ltd (IRFC)


Current Share Price – INR 20.6 (July 20, 2022)


Market Cap – INR 26,986 cr


 

1. What is interesting about the stock?

At least once in our lifetime, we have had our footwear stolen on an Indian Railways train. If you haven’t, then count yourself lucky. Some of us have had this experience at a temple too, but that’s a story for some other time!


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 lakh crore annually. Not to forget the extraordinary scale of Indian Railways—its network spans around 68,000 route km! Undisputedly, the railway is a major contributor to jobs, GDP, and mobility. But it continuously needs funds to grow.. enter IRFC.


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 c. INR 4,600 crore. The Government of India remains the majority shareholder in the Company.


The role of IRFC is to mobilize funds for the railway infrastructure development in India. And it has turned that 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 over its borrowing cost on loans it makes to the Railways.


It raises funds through bonds and bank loans in domestic and international markets. IRFC set out to raise INR 66,500 cr in FY23. 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 that purchased its bond.


Indian Railways is the primary beneficiary of IRFC funding. In the FY21, IRFC contributed 67% of Indian Railways’ capex. It may even contribute more to Indian Railways’ capital spending in the future considering the amount of work that still needs to be done in the railway sector.


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.


The target is to electrify 33,000 kilometers of rail line across India by 2023 and the project is estimated to cost USD 2 billion annually. The gauge conversion project is estimated to cost USD 2 billion annually and reach 2,200 kilometers by 2023. India targets to roll out 35 bullet trains across the country by 2022 at the cost of USD 17 billion. Furthermore, Railways aims to attain net-zero carbon emissions by 2030.


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 for its funds considering that the Railways relies on it for almost half of its capex.

  • 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 credit costs 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 advance 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 11,134 cr in FY19 which has been rising steadily and reached INR 20,299 cr in FY22.

  • IRFC has not only been consistently profitable in the past five years, but the profit has also been increasing with 38% growth in FY22

  • ROA and ROE were quite healthy at 1.5% and 15.8% respectively in FY22

  • The railway infrastructure upgrade and expansion are generating more business for the IRFC. The Company is particularly well-positioned to benefit from the National Rail Plan 2030.

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 18% 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 0.7x and a TTM PE of 4.4x. Other NBFC peers like Bajaj Finance, Shriram Transport Finance, and Muthoot Finance trade at TTM PE of 52x, 14x, and 10x 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 15.8% and a dividend yield of 3.7%. IRFC looks good from a long-term perspective and should be evaluated by the investors.

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:

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


I write about the stock market, cryptocurrency, and blockchain. I have a Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.


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 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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