Indian Railway Finance Corporation Limited (IRFC Ltd) IPO
Indian Railway Finance Corporation Limited (IRFC Ltd), the Indian Railways’ dedicated NBFC is going public. The Rs 4,633 cr-worth IPO, which is the first one to go live in 2021, opened for subscription yesterday and closes tomorrow. In this article, we analyse IRFC’s business model, its financials, and IPO details to help you decide whether or not to apply for the same.
About IRFC Ltd
IRFC Ltd is registered as a systemically important NBFC under the category of an Infrastructure Finance Company with the RBI. It is the dedicated NBFC of the Indian Railways’, giving IRFC a monopoly in its field. Thanks to this, IRFC has played a vital role in enhancing the capacity of the Indian Railways by funding its annual plan over the last 3 decades.
Objectives of IRFC Ltd
- Finance the acquisition of rolling stock and infrastructure assets
- Lease railway infrastructure assets and national projects of the Government of India (GoI)
- Lend to other entities under the Ministry of Railways (MoR)
- Offer financial assistance to activities having forward and backward linkages
IRFC Ltd’s business model
IRFC is a state-run non-banking financial corporation dedicated to serving the Indian Railways and other entities falling under the ambit of the Ministry of Railways. It is involved in borrowing, lending, and leasing activities, all relating to the Indian Railways. IRFC raises/borrows funds from the market and lends it to the Indian Railways, which uses the money to acquire rolling stock assets, both powered and unpowered vehicles including coaches, trucks, locomotives, containers, wagons, and trollies. This is one of IRFC’s sources of income.
The PSU NBFC also acquires assets required by the Ministry of Railways and offers the same on lease to the Ministry. In doing so, IRFC earns lease rentals. The lease period spreads across 15 yrs to 30 yrs, where the first 15 yrs focus on recovering the principal, the weighted cost of borrowing, and a margin; and the last 15 yrs generate revenue. IRFC also finances other entities under the Ministry of Railways (MoR) and facilitates priority capital expenditure (capex) for the national carrier.
Talking about raising funds, IRFC Ltd borrows from both domestic and/or international markets. It sources funds from diversified avenues including equity infusion, term loans from banks/financial institutions, taxable and tax-free bonds issuances, internal accruals, asset securitisation, ECB’s, and lease financing.
Cost-plus business model of IRFC Ltd
IRFC operates on the cost-plus model, which is beneficial in many ways. For one, it earns an additional margin. The expenses of IRFC Ltd relating to foreign currency hedging costs or losses and gains along with hedging costs for interest rate fluctuations are included in the weighted average cost of incremental borrowing. On this, IRFC earns additional margin as decided by the MoR. Further, the arrangement also gives IRFC Ltd a relatively higher margin, making its liquidity position favourable. Moreover, this arrangement guarantees IRFC a profit margin, which is an advantage.
Highlights of IRFC Ltd
- IRFC gets sovereign support, which sets it apart from its peers
- IRFC receives lease rentals from Indian Railways 6 mth in advance, that is, in Apr and Oct
- Due to major exposure to the MoR, IRFC has 0 NPAs
- IRFC enjoys the highest credit ratings for an Indian issuer for both domestic and international borrowings
IRFC’s Credit ratings from several entities
- CRISIL: AAA and A1+
- ICRA: AAA and A1+
- CARE: AAA and A1+
- Moody’s: Baa3 (Negative) rating
- Standard and Poor’s: BBB (Stable) rating
- Fitch: BBB (Negative) rating
- Japanese Credit Rating Agency: BBB+ (Stable)
