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Home >Markets >Mark To Market >IRFC IPO: Three things that investors need to check

Indian Railway Finance Corporation Ltd’s (IRFC) initial public offer (IPO) opens today with a price tag of Rs. 25-26 per share. The public sector non-banking financial company is valued at Rs. 33, 978 crore at the upper end of the price band, which is equal to its estimated book value for FY21.

IRFC is a captive lender to the railways which gives it a steady revenue run-rate. It follows a lease rental model while financing rolling stocks assets of the railways besides also financing large projects. In essence, it is an infrastructure player and is a stock for the long haul. Nevertheless, it would be subject to the standard public sector discount by investors.

Key things that investors need to keep in mind while investing are:

A one-track bet

IRFC’s revenues are fixed beyond the expected growth of capital expenditure of the Indian Railways. The lender is allowed to charge a fixed margin on its loans to the railways. During FY19 and FY20, its margin was fixed at an average of 40 basis points over the weighted average cost of borrowing for financing rolling stocks assets and 35 basis points for financing projects. This means that growth in core interest income depends on how fast the capex of railways expands which the lender can fund. The capex has grown 20% in a compounded annual growth rate basis over the past five financial years.

Speed bump from privatization

The government has dipped its toes into the privatization of the Indian Railways through partnerships. In such cases, the Railways have the choice to alter their funding. This in turn could take away opportunities from IRFC towards private players or even banks. This is a key risk that investors need to watch for, according to analysts at Nirmal Bang. “Any shift in the funding pattern of Indian Railways can impact IRFC’s growth prospects. For example, in case Indian Railways opts to borrow directly from banks and other financial institutions instead of IRFC or opts for public-private partnerships," a note from the brokerage said.

Free of risk, not risk-free

IRFC being the money purse for Indian Railways has exposure to a risk-free public sector infrastructure industry. Since the railways repay the company twice a year, the lender has no bad loans. For it to have delinquencies, the railways have to default. However, despite financial constraints, repayment delays from the railways have been low. That said, IRFC is not free of risk. The company is exposed to changes in policies involving the railways which may cause short-term disruptions.

Analysts believe that the IPO offers a long-haul bet and is fairly priced in comparison to peers such as Power Finance Corporation Ltd and Rural Electrification Corporation Ltd. But given the predictable earnings, a meaningful upside is unlikely.

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