IRFC IPO kicks off: Brokerages say subscribe with long-term gains

Most brokerages say the IRFC IPO is attractively priced and can be a good bet for conservative long-term investors, given the company's low-risk profile and consistent earnings visibility.

Agencies
The IPO of IRFC -- the dedicated market borrowing arm of the Indian Railways -- includes a fresh issue of up to 1,188,046,000 shares.
NEW DELHI: The Rs 4,633-crore IPO of Indian Railway Finance Corporation (IRFC) kicked off on Monday. Most brokerages advised investors to subscribe to the issue with a long-term investment horizon.

They said the IPO is attractively priced and can be a good bet for conservative long-term investors, given the company's low risk profile and consistent earnings visibility. That said, expansion drivers for return on equity (RoE) or margins are missing, analysts said. They expect good returns from the stock only in the long run.

The IPO includes a fresh issue of up to 1,188,046,000 shares aggregating up to Rs 3,089 crore and an offer for sale (OFS) of 594,023,000 shares by the government worth Rs 1,544 crore. These shares are being sold in the price band of Rs 25-26. The quota for retail investors has been fixed at 35 per cent of the issue size while that for qualified institutional bidders (QIBs) quota is fixed at 50 per cent and for non-individual investors at 15 per cent.


Anand Rathi finds the IPO valuation attractive. It said the company enjoys high credit worthiness, but is highly dependent on Indian Railways' capex plans.

"The government has undertaken various policy interventions in order to liberalise the Railways including development of freight corridors, high speed railway and elevated corridors. It has also permitted 100 per cent FDI on automatic routes in a large number of railway infrastructure areas. Considering capex visibility, we recommend a "subscribe" rating to this IPO with a long-term view," the brokerage said.

Astha Jain of Hem Securities said while valuations look reasonable and she likes the low risk, strong asset liability management and the cost-plus-business model of the company, she sees limited expansion on margin and return on equity (ROE) fronts.
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“Looking at the strong business profile of the company, but with limited growth aspects, we give Subscribe rating for long term. That said, we are not expecting any major negative movement for the stock after listing,” Jain said.

IRFC is the dedicated market borrowing arm of the Indian Railways. Its primary business is financing the acquisition of rolling stock assets, leasing of railway infrastructure assets and national projects of the government and lending to other entities under the Ministry of Railways (MoR).

Choice Broking said the valuation at a price to book value (P/BV) of 1 time looks attractive for long-term conservative investors, considering the company’s strong profitability growth of 26.3 per cent during FY18-FY20, double-digit return on equity (RoE) of 12.2 per cent in FY21 and low risk profile of the business with zero gross non-performing assets (NPAs).

Ahead of the IPO, IRFC on Saturday raised Rs 1,398.63 crore from 31 anchor investors. The issue will close for subscription on January 20.
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“The issue is attractively priced considering its secured AUM growth, zero NPA status, low borrowing cost, low cost structure business strong asset liability management. IRFC is planning to increase its financing portfolio by funding in expanding existing network and future requirements such as funding under high-speed train project and public private partnership (PPP) mode. Hence, we recommend investor to ‘Subscribe’ for this issue,” Arihant Capital Markets said.

In FY20 , the company financed Rs 71,392 crore, accounting for 48.22 per cent of the actual capital expenditure of the Indian Railways.
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"Keeping in mind the relatively low risk business model, strategic role in financing growth of Indian Railways and long term prospects considering electrification and network expansion, we recommend a SUBSCRIBE rating to the offer, as a long term investment opportunity. The offer is well priced at a 1 time book value per share (BVPS) as of September 2020," said BEPL Capital.

As of September 30, 2020, the company's total AUM consisted of 55.34 per cent of lease receivables primarily in relation to rolling stock assets, 2.25 per cent of loans to central public sector enterprises entities under the administrative control of MoR and 42.41 per cent of advances against leasing of project assets..

The company's total revenue rose 22.15 per cent to Rs 13,421 crore in FY20 from Rs 10,987 crore in FY19. Sales were up 19.33 per cent in FY19. It stood at Rs 7,384 in the six months ended September 30.

Profit for the six months ended September 30 stood at Rs 1,886.84 crore against Rs 3192 crore5 in FY20, Rs 2,140 crore in FY19 and Rs 2,001 crore in FY18.

The company's capital adequacy ratio as of March 31, 2020 and September 30, 2020 was 395.39 per cent and 433.92 per cent, respectively. As of September 30, 2020, the company did not have any non-performing assets.
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