Should You Invest in IRFC IPO?

Financials of IRFC

Here is a quick look at the financial performance of IRFC over the last five years:

All amounts in INR Crore

A quick glance at the financial performance of IRFC over the last five years highlights the robust growth displayed by the company. Within five years, the total income of the company showed a CAGR of 12.99%. The profit after tax grew at a CAGR of 33.95%. Also, IRFC’s total assets grew at a CAGR of 16.04%. These are phenomenal figures for an NBFC. While the long-term debt also increased at a CAGR of 26.35%, it can be attributed to IRFC’s business model. While it takes long-term debt, it has a lease agreement with the MoR that ensures the repayment of the debt.

IRFC has a unique business model and comparing it to any industry benchmark will not be possible. However, its financial performance is indicative of its fundamental strength, making its IPO a good investment option.

SWOT Analysis

In 2017, the Union Cabinet had approved the listing of five railway companies – IRCON International, IRCTC, Rail Vikas Nigam, RITES, and IRFC. Of these, IRFC is the fifth company to launch an IPO. Being a railway company, before we look at the SWOT analysis of IRFC, let’s take a quick look at Indian Railways.

Indian Railways is huge. It is the largest network in the world in terms of the number of passengers it ferries and the fourth-largest for cargo. Also, India has the largest rail network in Asia. However, with respect to India’s population, Indian Railways has one of the lowest penetration per million of the population. To improve the reach of railways, the Ministry of Railways has received Rs.15 lakh crore from the Union Government for developing its infrastructure. Since IRFC is the rolling assets provider for the Indian Railways, this means better prospects for the company in the future. In FY 2021, IRFC has already disbursed Rs.30,000 crore to the Indian Railways.

1. Strengths of Indian Railway Finance Corporation 

• Indian Railway Finance Corporation plays a strategic role in financing the growth of Indian Railways since it is its dedicated market borrowing arm
• IRFC offers a competitive cost of borrowing since it has diversified sources of funding and has the strongest credit ratings in India
• It has performed consistently over the decades and has a cost-plus standard agreement with the Indian Railways that allows it to generate steady revenue
• IRFC has a low-risk business model due to the nature of its agreement with the MoR
• It follows an active asset and liability management strategy that ensures a minimal mismatch between assets and liabilities
• IRFC boasts of a senior management team with extensive experience in corporate lending, structured finance, and law, with exposure to the private and government sectors.

2. Weaknesses of Indian Railway Finance Corporation

• The biggest weakness is the fact that IRFC primarily earns its revenue from Indian Railways. Therefore, its growth relies on that of the Railways.
• The D/E Ratio (debt-to-equity) is very high since IRFC has high long-term debt.
• The profitability of IRFC depends on the MoR accepting the margin over the costs as profit.

3. Opportunity to Investors – Valuation of the IPO

Since comparing values won’t be possible due to the unique nature of the business of IRFC, let’s calculate the intrinsic value of the company and compare it with the proposed IPO value.

We will use the intrinsic value formula provided by the founder of value investing – Benjamin Graham:

Intrinsic Value = Current Earnings x (8.5 + [2 x expected annual growth rate])

In FY 2020, IRFC booked profits of Rs.3659.40 crores. Also, the estimated annual growth rate is 9.5%. Therefore,

Intrinsic Value of IRFC = 3659.40 x (8.5 + [2 x 9.5]) = Rs.100,633.5 crores

Even if we deduct a margin of safety of 10%, the intrinsic value of IRFC = Rs.90,570.15 crores

As per the IPO structure, the company has a market cap of Rs.4633.37 crores. 

4. Risk Factors

• IRFC derives a significant amount of its revenue from operations from the Indian Railways. Therefore, a loss of or reduction in business from the Indian Railways, any direct borrowing by the Indian Railways, or the introduction of any new avenues of funding by the MoR could have an adverse effect on its business.
• Its business is dependent on the continued growth of the Indian railway sector. Therefore, it is susceptible to the government’s initiatives to modernize the railways and other policies. Any slowdown in the growth of Indian Railways will impact its business and results of operations.
• IRFC’s ability to operate efficiently is dependent on its ability to maintain diverse sources of funds and at a low cost. Any disruption in its funding sources or any inability to raise funds at a low cost could have a material adverse effect on its business, financial condition, and results of operations.
• If the margin on the Rolling Stock Assets leased to the MoR by IRFC is not favorable, it may have an adverse impact on its financial condition and results of operation.
• Any mismatch in the tenor of its leases and borrowings may lead to reinvestment and liquidity risk, which may adversely impact the company’s financial condition and results of operations.
• The Standard Lease Agreement between IRFC and the MoR is executed after the end of the Fiscal to which it relates and there can be no assurance that the agreement will be executed each year.
• Any downgrade in IRFC’s credit ratings or India’s debt rating could increase its finance costs and adversely affect its ability to borrow funds and its business, results of operations, financial condition, and cash flows.
• The company’s risk management measures may not be fully effective in mitigating risks in all market environments or against all types of risks, which may adversely affect its business and financial performance.
• Non-availability of funding from the Life Insurance Corporation of India (LIC) matching the requirement of funds by Indian Railways for railway projects under EBR-IF may affect the asset-liability position of the Company.
• Since IRFC is wholly-owned and controlled by the Government of India (GoI), it is susceptible to changes to its policies. The GoI will continue to retain a majority shareholding in the company after the Issue, which will allow it to exercise significant influence over IRFC. Further, the GoI could require the company to take actions aimed at serving the public interest, which may not necessarily be profitable or financially feasible.

5. Promoters of Indian Railway Finance Corporation IPO

1. The President of India acting through the Ministry of Railways.

6. Things to Keep in Mind Before Investing in IRFC IPO

In this article, we have tried to offer all the information that you may need before making a decision regarding investing in the IRFC IPO. Here are some things that you need to keep in mind before investing:

1. IRFC has a unique business model and relies heavily on Indian Railways for profits.
2. As long as the agreement between IRFC and MoR keeps renewing, the company runs a risk-free business despite having high long-term debt.
3. It is the first public sector NBFC to get listed.
4. With the Indian Railways looking to expand and reach more people, infrastructure requirements will mean more revenue for IRFC.
5. However, if the Union Government or MoR changes its policies regarding IRFC, then its profitability can get affected.

Happy Investing!