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Ever since the first passenger train pulled out of Bombay in 1853, the Indian Railways has gone on to employ some 1.2 million people, whilst generating revenues of around INR 2 hundred thousand crores every year. With such a massive contribution to employment, GDP, and mobility, and a 68,000 kilometers network of railway tracks under its control, Indian Railways is in constant need of funds. That is where the IRFC comes into play.
Indian Railway Finance Corporation, or IRFC, was formed in 1986 as the financial arm of Indian Railways with the purpose of mobilizing funds for the latter. In January 2021, it raised INR 4,600 crores via an IPO. The Indian Government still remains the major stakeholder.
The relationship with Indian Railways puts the IRFC in a special position, where it guarantees the IRFC of a constant revenue stream and IRFC is allowed to charge a fixed interest margin over its borrowing cost on loans it makes to the Railways. It raises funds through bonds and bank loans in domestic and international markets. The Corporation is set out to raise INR 1 trillion in the Fiscal Year 2022.
The high demand for IRFC bonds in the overseas markets has enabled it to borrow at favorable rates. For example, in the first half of 2021, it issued 20-year bonds at a coupon rate that was below what the Indian Government had offered to investors that purchased its bond.
IRFC has an unwritten sovereign guarantee. If IRFC is unable to meet its debt obligations, the Indian Government through the Ministry of Railways can step in to foot the bill.
So, what is our view on the company valuation?
Considering the projects that Indian Railways plans to undertake and the huge funding requirement they will need, IRFC still has plenty of growth opportunities ahead. The company has delivered more than 17% revenue CAGR over the past 5 years.
IRFC is currently trading at a price-to-book ratio of 0.8x and P/E (TTM) of 5.5x which is significant discount to other NBFC players. Investors tend to assign discount to public sector companies and for single borrower risk, which may explain IRFC’s low valuation ratios.
IRFC has a ROE of 13.3% and dividend yield of 4.4%, so it looks good from a long-term perspective, and should be evaluated further by investors.
Key risk to the analysis is squeeze in the margins by Indian Railways. IRFC could also face risks if the roll out of projects by the Indian Railway is slower than expected.
So, would you invest in Indian Railway Finance Corporation?
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