IRFC IPO: Is it worth to invest?

In the ongoing bull market, here comes the first IPO of 2021. Businesses are positive about recovering from the economic blow of the pandemic in 2020, and this is why some brilliant IPOs are all set to be launched in 2021.

The financial arm of Indian Railways, the Indian Railway Finance Corporation (IRFC) will hit the stock market in the next week. The IPO which was held in abeyance last year owing to COVID-19 is now set to hit the market from January 18 to January 20. This is going to be the first IPO by a non-banking financial company (NBFC) in the PSU sector. 

IRFC IPO consists of 1,782,069,000 equity shares of the face value of ₹10 totalling up to ₹4,633.38 Crore.

Let's get into the company details and analyse the investment prospects. 

About Indian Railway Finance Corporation (IRFC)

The Indian Railway Finance Corporation was incorporated on December 12, 1986, and is a state-owned enterprise, wholly owned by the Government of India (GoI) through the Ministry of Railways (MoR). IRFC is mostly involved in financing the procurement of rolling stock assets, leasing of railway infrastructure assets, and lending to entities under the Railway Ministry.

IRFC has a strong leasing model for financing the rolling assets. It has the highest credit rating for an Indian issuer for domestic and international borrowings. Being the financing arm of Indian Railways, IRFC is in charge to assemble funds from domestic or overseas market for the Railway Ministry, needed to obtain rolling stock assets for example wagons, trucks, electric multiple units, locomotives, coaches, together with its upgrading, development, as well as assets management.

It sticks to a financial leasing standard to fund rolling stock assets purchasing for a lease period of 30 years. In fiscal 2019, the actual capital expenditures by the Indian Railways were Rs. 1,334 billion, out of which, IRFC financed Rs. 525.35 bn accounting for 39.34% expenditures.

All you need to know about the IRFC IPO: 

• The company's chief business is funding the procurement of Rolling Stock Assets and Project Assets of the Indian Railways and advancing to other entities under the Ministry of Railways.
• IRFC is registered with the Reserve Bank of India having the position of an NBFC and is categorised under the category of an 'Infrastructure Finance Company' of the RBI Act. Plus, IRFC IPO will be the first by a public sector NBFC.
• It is significant to note that IRFC will not get any proceeds from the offer for sale and the proceeds will go to the promoter of the company, i.e., the Government of India.
• The grey market premium advocates an upside of ₹ 1-2 for the price of ₹ 25-26 per share.

Financial performance of the company

The financial performance of IRFC over the last five years shows the healthy growth of the company. In the last five years, the total income of the company exhibited a CAGR of 12.99%. The profit after tax expanded at a CAGR of 33.95%. 

Furthermore, IRFC's total assets increased at a CAGR of 16.04%. These are remarkable statistics for an NBFC. Although the long-term debt also rose at a CAGR of 26.35%, it is due to the IRFC's business model. Even though it takes long-term debt, it has a lease contract with the MoR that safeguards the settlement of the debt.

Competitive Strengths of the Company

• Strategic role in Indian Railways growth
• Sound credit rating i.e., CRISIL AAA/A1+ and ICRA AAA/A1+
• Competitive cost of borrowing
• Strong financial performance
• Sound asset-liability management
• Experienced management team

IRFC IPO Details

IRFC IPO Tentative Timetable

The IRFC IPO open date is January 18, 2021, and the close date is January 20, 2021. The issue may list on January 29, 2021.

Who can bid how much?

The bids for the issue can be created for a lowest of 575 equity shares and afterwards in multiples. Equal to 50 per cent of the net issue will be set aside for the Qualified Institutional Buyers (QIB) whereas the company has preserved less than 35 per cent of the issue for the retail investors. Though, 15 per cent of the issue will be kept for Non-Institutional category.

Objective of IPO

The objective of the IPO as per the DRHP are: 

1. Enlarging equity capital base to encounter future capital obligations occurring out of growth in business; and

2. General corporate purposes.

IRFC expects to achieve the benefits of listing their Equity Shares on the Stock Exchanges and enhancement of their brand name and creation of a public market for their Equity Shares in India.

Risk Factors

• IRFC's aptitude to function efficiently is reliant on its capability to continue various sources of money and at a cheap rate. Any disturbance in its funding sources or any failure to raise funds at a cheap rate could have a material unpleasant effect on its business, financial condition, and results of operations.
• If the margin on the Rolling Stock Assets leased to the MoR by IRFC is unfavourable, then it may damage its financial situation and results of operation.
• Any discrepancy in the tenor of its leases and borrowings may direct reinvestment and liquidity risk, which may poorly influence the company's financial state and outcomes of operations.
• Any reduction in IRFC's credit ratings or India's debt rating could intensify its finance costs and badly impact its capability to borrow funds and its business, and results of operations, financial condition, and cash flows.
• Since IRFC is controlled by the Government of India (GOI), it is vulnerable to changes to its policies. The GOI will persist in holding a majority shareholding in the company after the issue, which will permit it to exert considerable effect over IRFC. Moreover, the GoI could oblige the company to work for serving the public interest, which may not essentially be lucrative or financially possible.

Final Thoughts

IPO is a good way to enter stock market industries. This year several IPOs are lined up, but IRFC IPO is definitely among the most significant ones. The IPO valuation of the company through Benjamin Graham is highly undervalued.

IRFC has its fair share of strengths and risks associated with it. Investors are advised to consider both these factors of the IRFC IPO investment and then make a cognizant decision.