Analysts said the IPO looks attractively priced and can be a good bet for conservative long-term investors, as expansion drivers for return on equity (RoE) or margins are missing, even as the company is seen reporting consistent growth numbers.
Choice Broking said that valuation at 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).
Astha Jain of Hem Securities said that 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.
“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).
The government is looking to sell 1,782,069,000 shares in the Rs 25-26 price band. Quota for retail investors have been fixed at 35 per cent of the issue size. Qualified institutional bidders (QIBs) quota is fixed at 50 per cent, while the quota limit for non-individual investors has been fixed at 15 per cent.
The IPO includes fresh issue of up to 1,188,046,000 shares, aggregating up to Rs 3,088.91 crore. It also comprises an offer for sale (OFS) of 594,023,000 shares by the government, amounting to Rs 1,544.44 crore.
Ahead of its IPO, IRFC on Saturday said it has raised Rs 1,398.63 crore from 31 anchor investors. The issue will close for subscription on January 20.
“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 investors 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 Indian Railways.
“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.
IRFC’s profit for the six months ended September 30 stood at Rs 1,886.84 crore, against Rs 3,192 crore 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.
“During FY17-20, IRFC’s overall revenues grew at a CAGR of 19 per cent driven by strong growth in average AUM (nearly 25 per cent CAGR). The company is cost efficient with a cost-to-income ratio at 2.94 per cent with moderate margins (NIM: 1.38 per cent),” LKP said in a note.
Net proceeds of the IPO are proposed to be utilised towards augmenting the company’s equity capital base to meet future capital requirements arising out of growth in business and general corporate purposes.
DAM Capital Market Advisors (formerly known as IDFC Securities), HSBC Securities and Capital Markets, ICICI Securities and SBI Capital Markets are managing the offer.
