IRFC IPO : Subscribe or NOT?

The data has been compiled from various sources and might have small difference but overall theme is to subscribe or not — we will focus on that

IRFC IPO– Incorporated in 1986 by the Ministry of Railways (MoR), the Government of India, Indian Railway Finance Corporation (IRFC) is a wholly-owned public-sector undertaking

Business — Its engaged in the activity of mobilising funds on behalf of the Indian Railways to finance its procurement of locomotives, passenger coaches, and wagons as well as to fund other railway infrastructure assets. Apart from providing finance to the MoR, IRFC has provided loans to Rail Vikas Nigam Limited (RVNL), which is wholly owned by the MoR.

Offer purpose — Offer for sale (4600cr) including fresh issue of 3100 cr. for expansion and general purposes,1500 cr will flow to Goverment

Key Service domains – NBFC -Infrastructure finance to MoR

Risks —

Low RoE, lending to government entities at the fixed spread,

and risk of equity dilution from OFS in subsequent years

Strength

Zero NPAs, Lowest Borrowing cost (AAA rated), high operationally managed entity

Strategic role in financing growth of Indian Railways with regular demand for loans which is favorable for its asset growth.

Competitive cost of borrowings: Because IRFC belongs to GoI, and lends to GoI owned entities, the cost of borrowing is very low for IRFC.

Consistent financial performance and cost-plus model: IRFC charges a fixed interest rate for sourcing loans for MoR. It gets fixed spread in the range of 0.3% to 0.4% above its cost of borrowings.

Future

IRFC is strategically important to the MoR as it raises around 25-35% of the total funding requirement (plan outlay) of the Ministry.

It is growing at good rate but ROE can’t be expanded much.

Could be a consistent dividend player

Valuations

Profit making company with stable below par ROE

AUM growth (3yr CAGR>20%) coming at 1x H1FY21 P/BV, Valuations are underpriced to reasonable range of P/B ~1

Should we apply?

People can subscribe looking at mid term to long term prospects

Avoid if one is averse to PSU or looking at big gains

Stellar gains at IPO may not be visible due to large IPO size

One can wait to enter at low prices for investment purposes for dividend play as well

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