IRFC IPO review: IRFC (registered as NBFC) is wholly owned by GOI (Government of India) and administered through the Ministry of Railways (MoR). IRFC is a market borrowing arm of Indian Railways and is primarily in the business of leasing operation and financing of project assets. In FY20, AUM of IRFC grew by 32.4% YoY and disbursement by 35.9% YoY.

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IRFC saw a strong growth during FY20, NII grew at 16.2% vs 9.2% in FY19, PPoP by 14.8% vs 9.9% in FY19, PAT saw a strong growth of 49.2% vs 6.9% in FY19 as it is not required to pay MAT tax. As a borrowing arm, IRFC financed 48.2% of Capex of Indian railways through various sources of funding from the market. At upper price band, IPO is priced at a P/E of 7.6x and P/BV of 1.0x based on FY20 with ROA of 1.3%. As backed by GOI with nil asset quality and strong CAR at 434% and ROA of 1%+, IDBI Capital recommends subscribing to the issue.

IRFC IPO: Key Investment Rationale

Financial arms of Indian Railways:

IRFC plays a key role to finance its operations. Its main focus is to finance rolling stock assets (47% of total capex) and Project assets (47.5% of total capex).

IRFC: Diversified sources of funding with cost plus model

IRFC focus is long term debt (97%) for financing with varied sources of funding such as ECB, bonds and rupee term loans. IRFC also entered into an agreement with LIC to avail Rs 1,500bn over a period of five years (starting from FY2016) with30 years of tenor (Under MoU).

IRFC has two Business models:

Leasing Operation:

Under this IRFC follows a financial leasing model for financing the Rolling Stock Assets. The period of lease with respect to Rolling Stock Assets is typically 30 years comprising a primary period of 15 years followed by a secondary period of 15 years, unless otherwise revised by mutual consent. IRFC also follow a leasing model for Project Assets with lease periods of 15 to 30 years depending on the mode of raising funds for such leasing However; for all Rolling Stock Assets acquired during a financial year by Indian Railways IRFC enter into a lease agreement with the MoR following the close of each respective Fiscal (the “Standard Lease Agreement”).

Financing of Project assets:

Under this, IRFC acquires leasehold interest in the project asset under a lease agreement and MoR is required to pay lease rentals.

IRFC Valuations:

There are no directly comparable peer companies which operate in a business space similar to that of IRFC. However, when comparing it with other PSU NBFCs, IRFC stands apart with nil NPAs but lower (albeit stable) margins. On a diluted basis at the upper price band, IRFC is valued at 1x FY20 BVPS. However, being the dedicated market borrowing arm for the Indian Railways, IRFC enjoys the highest possible credit ratings for an Indian issuer both for domestic and international borrowings.