Fundamental Analysis of Indian Railway Finance Corporation Ltd (IRFC)

Company Overview

Indian Railway Finance Corporation (IRFC) was incorporated on December 12, 1986, with an objective to procure funds for the Indian Railways from domestic and overseas capital markets. The main objective of the company is to use market borrowings to finance the “Extra Budgetary Resources” (EBR) needs of the Indian Railways at the most affordable rates and conditions. The primary business activities revolve around financing the acquisition of rolling stock assets, leasing of railway infrastructure assets and national projects of the Government of India, as well as lending to other entities under the Ministry of Railways (MOR).

Industry Highlights

During FY 2023, the Indian Railways registered a Year-on-Year (YoY) growth of 25% in revenues to ~₹2.40 lakh crore. As of August 2023, the Indian rail network ranks at 4th position globally with ~22,593 active trains (9141 freight and 13,452 passenger trains). IRFC may witness ample financing requirements from MoR as the government announced 5,000 km of Metro rail network by 2047 in 100 cities. 

In addition, the production of 400 new Vande Bharat Trains is expected to be completed in the upcoming 3 years. Moreover, the station reconstruction project is likely to create new business avenues for IRFC as the project will improve the passenger experience and provide new employment opportunities.

Segment Overview

The company generates revenue via 2 business segments, including leasing and financing. During FY 2023, the business derived ~69% of revenue contribution from the leasing segment, and the remaining ~31% came from the financing segment.  

IRFC’s operation revolves around leasing, lending and borrowing. In the lending operation, it finances the rolling stock and project assets by using a leasing approach. The normal lease term is 30 years, with a primary component lasting 15 years and a secondary component lasting another 15 years. With respect to lending, the company lends funds to railway entities to elevate its growth plan and has provided loans to Rail Vikas Nigam Limited (RVNL) and IRCON. 

The borrowing operation deals with raising funds through different sources at very competitive rates. The company’s source of funds includes the issue of taxable and tax-free bonds, term loans from banks and financial institutions, commercial papers, external commercial borrowings and asset securitisation. The company acquires funds at a significantly low cost thanks to its strong credit ratings.

Financial Performance

The company has consistently exhibited robust financial performance in past periods on the back of raising funds at competitive rates. This has helped the business to maintain a low cost of borrowing. In addition, the strategic relationship with the Ministry of Railways has allowed IRFC to maintain a low-risk profile. During 1H FY 2024, the company’s revenue rose by 17.56% on a YoY basis to ₹47,683.95 crore and profit for the period stood at ₹3,106.45 crore. This growth was backed by low overheads, administrative costs and high operational efficiency. 

As of September 30, 2023, the Asset Under Management stood at ₹4,66,171.88 crore and grew at a CAGR of 23.90% during FY2019-1H FY 2024. During the Q1 FY 2024, the company experienced a quarter-on-quarter (QoQ) growth of 18.69% in revenues to ₹6,679.17 crore. Net Interest Income for the quarter amounted to ₹1551.51 crore, reflecting a fall of 7.40%. 

The company operates a low-risk, cost-plus business model, which helped IRFC to record nil Gross Non-Performing Assets (GNPA). It recorded low overheads, administrative costs and high operational efficiency during the quarter. In addition, the Indian Railway Finance Corporation enjoys nil tax liability as it is exempted from the RBI’s asset classification norms, provisioning norms, and exposure norms to the extent of direct exposure to MoR.

Outlook

In the future, the strategic priorities of the company revolve around the diversification of its lending portfolio in order to broaden its horizons and venture further into financing the railway ecosystem and maintaining competitive borrowing costs. In addition, the company would be focused on prudent financial management, diversifying its borrowing portfolio by including various financial instruments at cost-competitive rates and breaking new ground with investors and markets.

The revenue growth opportunities for the business include finance lease of rolling stock for NTPC under the General Purpose Wagon Investment Scheme (GPWIS) of MoR. In addition, the company has received in-principle approval from the Board for a Term Loan for the Haryana Orbital Rail Corridor (HORC), a railway line from Palwal to Sonipat, being promoted by Haryana Rail Infrastructure Development Corporation Limited (HRIDC).

SWOT Analysis

Strengths

• The demand for the company’s services has witnessed ample growth, resulting in consistent revenue growth.
• The low-cost business model helps the business to maintain effective operational efficiency.

Weaknesses

• The higher interest payment against earnings could be a red flag for the company.
• The sale of holdings by Mutual Funds may fade investors’ interest.

Opportunities

• The growing infrastructure plays a pivotal role in the revenue opportunities for IRFC.
• The healthy government policies for the growth of the sector may generate a strengthened business position for the future.

Threats

• The business could be hampered by the prevailing market risks caused by changes in the interest rates, liquidity risk, etc.

Conclusion

Indian Railway Finance Corporation (IRFC) is the dedicated financing arm of the Indian Railways for mobilising funds. The company has experienced meaningful growth in the business in terms of operational as well as financial performance. The company enjoys a healthy position on the outlook front as the sector is supported by the government itself. 

Disclaimer: This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.