IRFC Ltd

Verdict: Board this Rail

IPO Snapshot

Indian Railway Finance Corporation (IRFC) is launching a Rs. 4,633 crore IPO, between Mon 18th Jan 2021 to Wed 20^th Jan, 67% of which is fresh issue and 33% offer for sale (OFS) by Government of India, in the price band of Rs. 25-26 per share. Surprisingly, there is no retail discount, unlike most PSU IPOs of the past. Issue represents 13.6% of post-issue capital, with listing on 29^th Jan.

IPO to raise Capital, and not simply Disinvestment

Unlike most PSU IPOs which are OFS to only meet government’s disinvestment target, majority of this IPO will provide growth capital, as this wholly-owned subsidiary of the government, funds wagon purchase/project assets of Indian Railways. Being an NBFC, company’s need for funds is high, with last fund raise being a Rs. 2,500 crore rights issue at face value of Rs. 10 in March 2020. Sovereign backing helps keep cost of funds low and NPAs nil.

Zero Tax Paying Company

While company is not exempt from income tax, its actual tax liability was nil in FY20 as well as H1FY21 and will continue to be so, as long term financial leasing of wagons and projects yields huge unabsorbed depreciation in the company’s books and MAT is not applicable. Thus company’s earnings, which is spreads on lease rentals over borrowing cost, translates into profitability, as operating expenses are minimal.

Healthy Double-digit Growth on Topline and Bottomline

Since FY18, company’s AUM has grown at 26% CAGR to Rs. 2.8 lakh crore, as of 30.9.20. H1FY21 net interest income grew 18% YoY to Rs. 1,933 crore, with PAT surged 16% YoY to Rs. 1,887 crore, leading to an EPS of Rs. 1.6 for the first half. 1.4% net interest margin (NIM) and 12% RoE are healthy, given wholesale nature of lending. Thus, company’s business model can be viewed as sound with steady growth and low risk.

Attractive Valuation

On FY21E, IPO is priced at PBV multiple of 0.93x or PE multiple of 8x, which are attractive, given consistent growth expected in company’s financials on back of government’s increasing spending on making Indian Railways competitive. Having said that, scope for expansion in valuation multiple is limited, as many large PSU NBFCs like PFC, REC, HUDCO and even a bank like SBI are ruling at 5-30% discount to BV, due to government ownership. Thus, post listing, share price may mirror earnings trajectory, which has nevertheless been in healthy double digits.

At Rs. 26, company’s market cap will be Rs. 34,000 crore, making it the largest listed railway PSUs, among IRCTC, RVNL, Rites, Ircon, which have all been doing well. At this price, IRFC will be a mid-cap stock, but even a 10% jump may qualify it as a larger cap, keeping it on the radar of institutional investors.

Conclusion:

Healthy fundamentals, attractive valuation and a play on Indian Railways make this IPO an ‘apply’ for moderate yet consistent gains.

Grey Market Premium (GMP) of IRFC: Grey Market Premium of IRFC is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.