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IRFC IPO: Here’s All You Need To Know

The dedicated market borrowing arm of the Indian Railways plans to raise Rs 4,633 crore through a maiden offer.

Passengers stand in the doorways of train carriages as they travel by rail in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Passengers stand in the doorways of train carriages as they travel by rail in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Indian Railways Finance Corp. will finally launch its three-day initial public offering on Jan. 18, delayed by the Covid-19 pandemic.

The dedicated market borrowing arm of the Indian Railways plans to raise Rs 4,633 crore through maiden offer as it looks to provide for the capital expenditure requirement of the national prospectus. The price band for the offering has been fixed at Rs 25-26 apiece, according to the red herring prospectus reviewed by BloombergQuint.

The IPO comprises 178 crore shares, including a fresh issue of up to 118 crore equity shares and offer for sale of up to 59.4 crore shares by the government. The company, in its filings, said up to 50% of the net offer will be reserved for qualified institutional buyers, 15% for non-institutional buyers and remaining for retail investors.

The IPO, which is the first by a government-owned non-bank lender, also comes at a time when participation of retail investors in the equity markets in India and around the world has increased following the pandemic-induced lockdowns.

Key Details

  • Issue opens on: Jan. 18, 2021.
  • Issue closes on: Jan. 20, 2021.
  • Face value: Rs 10 per share.
  • Price band: Rs 25-26.
  • Fresh issue: Aggregating up to Rs 4633 crore.
  • Offer for sale: Rs 1,544 crore.
  • Minimum bid size: 575 equity shares.
  • Listing: National Stock Exchange and Bombay Stock Exchange.
  • Book Running Lead Managers: DAM Capital Advisors Ltd., HSBC Securities and Capital Markets (India) Pvt., ICICI Securities Ltd. and SBI Capital Markets Ltd.

Anchor Allocation

The company raised Rs 1,389.86 crore at Rs 26 per share from anchor allocations ahead of the IPO. The company will issue 53.45 crore shares to 31 entities, including to 20 schemes in four mutual funds.

Business

IRFC is registered with the Reserve Bank of India as an NBFC and is classified as infrastructure finance company.

Business Models

  • Financing of projects assets
  • Leasing operations

Started in December 1986, its primary business is to finance acquisition of rolling stock assets and project assets of the Indian Railways. For leasing operations, it’s in the business of leasing of railway infrastructure assets and national projects of the Indian government and lending to other entities under Ministry of Railways.

The company follows a financial leasing model for financing rolling stock assets. The period of lease with respect to rolling stock assets typically is 30 years—comprising a primary period and secondary period of 15 years each. As of Sept. 30, 2020, IRFC didn’t have any non-performing assets.

For financing of project assets, IRFC acts as an intermediary between Ministry of Railways and Life Insurance Corp. of India or other institutional funds to secure funding.

Objectives

The company plans to utilise the proceeds of the IPO to augment its equity capital base to meet the capital requirement, since it finances the acquisition of rolling stock assets, which includes both powered and unpowered vehicles, for example locomotives, coaches, wagons, trucks, flats, electric multiple units, containers, cranes, trollies of all kinds and other items of rolling stock components.

Amitabh Banerjee, chairman and managing director at Indian Railways, said in earlier interview to BloombergQuint that the railways has a huge capex outlay programme, and while a part of it will be provided for by the gross budgetary support, IRFC will play a major part in financing the projects. In FY20, IRFC financed ₹71,392 crore accounting for 48.22% of actual capital expenditure of Indian Railways.
“Last year we financed nearly 45% of the total capex requirement of the Indian Railways, and in the current financial it may go up to nearly 70%.”

The cost of borrowings was 6.82%, 7.09% and 7.27% in FY18, FY19, and FY20, respectively, and 3.91% and 3.55% (on a non-annualized) in 1HFY20 and 1HFY21, respectively.

Competition

IRFC face competition from public and private sector commercial banks and from other financial institutions that provide funding to other public sector entities under control of the Indian Railways. “Our competitors may have access to greater and cheaper sources of funding than we do,” the company said in the red herring prospectus.

Its primary competitors are public sector infrastructure finance companies, public sector banks, private banks (including foreign banks), financial institutions and other NBFCs

Valuation

At the upper band of issue price, IRFC is priced at 1x FY20 P/ABV. It’s cheaper among peers, including Piramal, Edelweiss and IIFL. The price to book value ratio is closer to Power Finance Corp., Rural Electrification Corp. and IDBI Bank Ltd.

Key Risk

  • High dependence on the Indian railways., as about 99% of revenue is generated through lease rental and interest payments.
  • Business depends on the growth of Indian Railways, and is susceptible to change in policies, or any slowdown in the growth of the transporter, as it faces significant competition from road, sea and air.
  • A higher share of public private partnership may impact the borrowing needs from IRFC.