IRFC – A great company, must have stock

Indian Railway Finance Corporation Limited (IRFC) is tapping the capital markets with its fresh issue of 118,80,46,000 equity shares and an offer for sale of 59,40,23,000 equity shares in a price band of Rs 25-26. The issue has opened on Monday, January 18 and would close on Wednesday, January 20. The total issue would raise approximately Rs 4,633.37 crore at the top end of the band. The company is the finance arm of the Indian Railways and arranges loans domestically and internationally for the railways.

The company has traditionally been leveraging its net worth between 8-10 times even though it is permitted to do so 15 times. IRFC uses a lease model and enters into a lease agreement for 15 years for the rolling stock consisting of coaches, wagons and locomotives. The lease rent is payable bi-annually in advance in April and October. The lease rent is calculated on the basis of weighted average cost of borrowing each year to which a commission/fee of 40 basis points is added.

IRFC is a lean and mean organisation having just about 40 employees with which it serves the only customer it has currently, Indian Railways. There is a possibility with private players being allowed to run trains, most of them would like to enter similar arrangements. While this is a possibility, it is yet to happen.

IRFC was granted recognition and classified as an infrastructure finance leasing company and was exempt form MAT (minimum alternate tax) under section AS12. This makes the company a zero-tax paying company as there is a surplus of unabsorbed depreciation in the books of the company. Post the 15-year period of lease, in which the principal amount, interest, depreciation and lending fee are all recovered, IRFC leases the asset for a further 15-year period in which a flat fee of Rs 1 lakh per annum is charged.

At the end of this period the asset is handed over to the Railways. The company currently has an AUM (Assets under management) of Rs 2.66 lakh core and going by the expansion plans of the Railways, this would more than double in under three years. Just today morning, the government has issued an addendum to the issue ad wherein they have stated that they would borrow an additional sum of Rs 51,000 crore in this financial year and that would make the total borrowing for 2020-2021 as Rs 1,13,567crore. The NAV of the company as on September 30 is Rs 26.67 and its Net Worth is Rs 31,686 crore.

The company being part of the PSU pack is mandated to distribute 30 per cent of its net profit as dividends every year. So far in 2020-21, the company has not declared any dividends. This effectively means that in roughly two months from now the share would be ready to be entitled to receive dividend for the full year. I would estimate that going by past records, the dividend should be in the region of Rs 1.05-1.25 per equity share. This becomes a bonus for the shareholders.

This company should be looked at as a fixed income product with an added appreciation and prospects of capital gains. Considering the fact that the current g-sec rates are around 6.5 per cent, and the leverage of 8 times would fetch the company income of 8x0.40=3.20 which makes a total of 9.70 per cent. This income would be a great one and ensure steady returns and investment interest from all categories of investors going forward.

In conclusion, an excellent investment opportunity from the government stable, ensuring steady returns and decent capital gains over the medium to long term. A must hold stock in one's portfolio.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)