- Wealth PMS (50L+)
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In the last 3 years, four companies had listed from the Indian Railways universe. While IRCON, RITES & RVNL had a decent listing, IRCTC went on to become a blockbuster. We wrote about IRCTC when it was added to the Multicap Portfolio in 2019.
There’s a new kid on the block. The lending arm of Indian Railways, IRFC is opening its IPO on Jan 18th.
Should you subscribe?
Short Answer: Most IPOs that launch in overheated markets tend to also be overpriced and rely on market conditions to generate quick returns. We think this one is an exception.
The fresh issue of 3088.9 Cr will be used for strengthening the equity capital base & to meet the growth capital for the future.
Indian railways in the fourth longest rail network in the world with a revenue of Rs. 1.83 trillion ($26.2 bn) for FY2020. It operates a total running track of 96,552 km. It is divided into 17 zones and operates more than 19,000 trains per day( 12,000 passenger trains & 7,000 freight trains)
The Indian Railways earns its internal revenue primarily from passenger and freight traffic.
Freight remains the major revenue segment for the Indian Railways. It utilises 1/3 rd of its capacity and generates 2/3rd of the revenues.
Currently ~30% of total freight traffic (in terms of tonne kilometres) of India moves on rail. Nine commodities including coal, iron, steel, iron ore, food grains, fertilisers and petroleum products support freight business.
Passenger trains utilise two-thirds of capacity but generate only one-third of the revenues. Train travel remains the preferred means for long-distance travel for a majority of Indians. With urbanisation & increasing population, the passenger traffic is expected to grow further.
The British made significant investments in building the railway infrastructure. Post Independence, the network growth of the Indian Railways was constrained due to lower investments.
The Indian Railways face issues with overstretched infrastructure. Around 60% of the routes have more than 100% utilisation.
In the last 70 years, freight loading grew by 13 times, passenger kilometres grew by 16 times. However, the route kilometres grew only by 23%.
IRFC is the dedicated market borrowing arm of Indian railways. Its primary business is financing the acquisition of rolling stock. They finance the rolling stock, lease it to Ministry of Railways and collect rental payments on timely basis.
It is the largest financier for Indian Railways with a contribution of 48.2% of total fund raise in FY20. As of March 2019, IRFC had financed 85.4% of Locomotives, 85% of passenger coaches & 70.4% of wagons held by Indian Railways.
*Image Source: IRFC DRHP
The company has long term AAA rating from all major credit rating agencies.
The weighted average cost of borrowings factors in hedging against foreign currency & interest rate fluctuations.
The total AUM consists of:
The company has strong Asset Liability management. They have positive ALM from 1 month to 5 year tenure.
There is a cap on their margins. They are entitled for 40 bps over the weighted average cost of borrowing for financing Rolling stock & 35 bps for Project assets.
At an upper band of Rs 26/- the company is looking at a valuation of 33,978 Cr market cap. This gives us a PE of 10.8 times. They have ~580 Cr of Net tax asset & unabsorbed deprecation. Because of which the PAT has boosted for this year. We can expect a PAT of approx 3300 – 3500 Cr for next year. This will give us a one year forward PE of 9.7.
The Book value per share, from the net worth of Rs. 31,500 Cr. is about Rs.26 per share, which means you are paying about 1x book.
The valuations are not expensive in our opinion.
The company should not be valued on AUM basis, given the leasing & asset transfer business model. The margins will remain in range given the cap on the spreads.
It is very rare to see a strong IPO with reasonable valuations in current market conditions. The management had left something for the investors on the table. One can subscribe for the IPO.
Given the growth prospects in Indian Railways and the strong fundamentals of the company, it can also be considered for long term as well.
Since our analysis is purely about the IPO, and does not consider your specific financial goals and risk profile, please consult an Investment Advisor before taking any action.
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