All you wanted to know about Indian Railway Finance Corporation (IRFC) IPO

Staff Writer   /   January 14, 2021

The Rs 4600-crore initial public offer (IPO) of public sector NBFC Indian Railway Finance Corporation (IRFC) is hitting the markets next week. IRFC IPO will be the first by a non-banking financial company (NBFC) in PSU segment. Here is all you wanted to know about this awaited share-sale.

What is IRFC

Indian Railway Finance Corporation has its registered office in New Delhi. The company has 26 permanent employees. IRFC is the dedicated market borrowing arm of the Indian Railways. It is wholly-owned by the Government and registered with the RBI as an NBFC. 

Its primary business is financing the acquisition of Rolling Stock Assets and Project Assets of the Indian Railways and lending to other entities under the Ministry of Railways. 

For fiscal 2021, the target to be borrowed from IRFC is Rs 625.67 billion. For FY20, IRFC posted a profit of Rs 3,192 crore and earnings per share was Rs 3.40. The company has generated strong revenue growth in last four years.

When does the IPO open

The IPO will open on January 18 and close on January 20. 

What is the price band

The price band for the IPO will be Rs 25-26 per share. 

What are IPO details

The issue size is for up to 178.20 crore shares, out of which 118.8 crore shares is the fresh issue, and 59.40 crore shares is under offer for sale. The offer for sale proceeds will go the Government of India. The net proceeds of the fresh issue are proposed to be utilised towards augmenting IRFC equity capital base to meet future capital requirements arising out of growth in business, and general corporate purposes. The face value of each share is Rs 10.

As per a tweet by Secretary, Department of Investment and Public Asset Management, “IRFC coming up for listing with a Rs 4600 crore+ issue in a price band of Rs 25-26 per share. Anchor book on Jan 15 and the Main book from Jan 18-20.”

Pre-IPO, the Government of India controlled 100% of the company. Upon completion of the issue, the GoI will control approximately 86.36% of IRFC paid-up equity share capital.

What is the minimum IPO investment

The lot size is 575 shares. So, at the upper band of Rs 26 per share, the minimum IPO investment for IRFC will be Rs 14,950.

What is the IPO listing date

IPO shares will be listed on bourses on Jan. 28-29 (tentative).

How does IRFC earn money

The vast majority of IRFC revenue is generated from leasing Rolling Stock Assets to the Indian Railways. Lease income, interest on loans and pre commencement lease interest income together represented 99.75% and 99.87% of IRFC total revenue from operations in Fiscal 2020 and in the six months ended September 30, 2020, respectively.

The business and revenues are substantially dependent on the policies of the MoR (Railways Ministry) and operations of the Indian Railways. Therefore, the overall prospects of IRFC business are closely tied to the relationship with the MoR.

It operates on a cost-plus based model. In Fiscal 2020, IRFC was entitled to a margin of 40 bps over the weighted average cost of incremental borrowing for financing Rolling Stock Assets. In Fiscal 2018, the margin for financing Rolling Stock Assets was reduced to 30 bps from 50 bps in Fiscal 2017.

How does IRFC raise money

IRFC funding requirements historically have been met through various sources including from taxable and tax-free bonds in India, term loans from banks/ financial institutions, external commercial borrowings including bonds and syndicated loans, internal accruals, asset securitization and lease financing. Its Cost of Borrowings was 6.82%, 7.09% and 7.27% in Fiscals 2018, 2019 and 2020, respectively, and 3.55% (non-annualized) in the six months ended September 30, 2020.

Do note IRFC is a non-deposit taking NBFC, and so has restricted access to funds in comparison to banks and deposit taking NBFCs. IRFC has in the past raised money from LIC.

What are the company’s debt ratings

IRFC has been accorded ratings of ‘AAA’ by CRISIL, ‘ICRA (AAA)’ by ICRA and ‘CARE AAA’ by CARE each with respect to its debt programme.

International credit rating agencies such as Moody’s have rated IRFC Baa3 (Negative) while Fitch, Standard & Poor’s and Japan Credit Rating Agency have rated BBB-‘Negative’, BBB- (Stable) and BBB+ (Stable).

What is the valuation of IRFC shares sold in IPO

NBFCs are usually valued based on Return on average Net Worth (RoNW). The six months ended September 2020 RoNW % is 6.09, which if annualized becomes 12.18%. The RoNW for FY20 was 11.57%.

There are no listed peers to IRFC business at the moment.

From Net Asset Value perspective, IRFC NAV is Rs 26.67 per share as on Sept. 30, 2020. So, IPO stock price is at a small discount to NAV.

Who are BRLMs to this IPO

The book running lead managers to the issue are DAM Capital Advisors Limited (formerly known as IDFC Securities Limited), HSBC Securities and Capital Markets (India) Private Limited, ICICI Securities Limited and SBI Capital Markets Limited.

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