Analysing IRFC Ltd. with FinnovationZ

Looking to invest in some fundamentally strong companies that are sure to add value to your portfolio? Look no further than Prasad Lendwe, the unstoppable finance YouTuber and founder of FinnovationZ. He's here to share his expert insights on how he carefully selects and scrutinizes stocks to ensure they're the right fit for his investment strategy. So, read on as we delve into the world of stock-picking with the one and only Prasad Lendwe!

Parameters that Prasad follows that you could too:

• Businesses that run in a monopoly or duopoly setup
• A competent management
• Good understanding of the company
• High margins

Companies that check mark the above parameters usually have stable revenue streams, maintain market share. Good management can make effective decisions, manage risk, and respond to market changes. High margins indicate a competitive advantage and strong cash flows for future growth.

One of the companies that fall in line with the parameters set by Prasad is Indian Railway Finance Corporation Ltd (IRFC). Despite being situated in a modest hotel in Delhi with a small team of 35-40 employees, IRFC boasts a market cap of ₹ 36,526 Cr. What's more, the company stands out from its peers due to its limited expenses, with employee costs comprising just 0.05% of revenues compared to the industry average of 7-10%. 

And the cherry on top? IRFC doesn't have to pay any taxes, thanks to a government exemption. With impressive growth in net income from 2018 to 2022 and a 16% CAGR in sales and 29% CAGR in profit over the last decade, IRFC is definitely a company worth considering for your investment portfolio. In this article, we'll dive deeper into IRFC's success and explore how you can identify similar stocks using key parameters.

IRFC IPO and Strong Linkage with the Government of India

Indian Railway Finance Corporation Ltd (IRFC) is a key player in the Indian railway sector, providing critical funding to the Ministry of Railways for the acquisition and creation of rolling stock and other infrastructure assets. As a government enterprise, IRFC enjoys a strong linkage with the Government of India (GoI), which is involved in its strategic direction, borrowing, and operational and financial performance targets.

Despite being exempted from RBI's asset classification norms, provisioning norms, and exposure norms, IRFC maintains a sound asset quality with a history of NIL non-performing assets (NPAs) and tax liability. The company's focus on minimizing borrowing costs has enabled it to borrow from diverse sources such as taxable and tax-free bonds issuances, term loans from banks and financial institutions, commercial papers, and external commercial borrowings.

One of IRFC's notable accomplishments is its successful Initial Public Offering (IPO) in January 2021, which saw the company raising ₹4,633 Cr. The IPO comprised a new issue of 118 crore equity shares aggregating to ₹3088 crore and an offer for sale of 59 crore equity shares aggregating to ₹1,544 crore by the GoI. Through the IPO, the GoI divested 5% of its shareholding, reducing its overall shareholding to 86.36%.

Revenue Model and Lending Activities of IRFC

Indian Railway Finance Corporation (IRFC) generates its revenue mainly through lease income and interest income, which accounted for 75% and 25% respectively in FY21. The company primarily follows a leasing model to finance rolling stock assets and project assets of Indian Railways. Typically, lease periods last for 30 years, consisting of a primary lease period of 15 years and a secondary period of 15 years. During the introductory lease period, the principal component and interest are recovered, and at the end of the lease, the assets are usually sold to the Ministry of Railways (MoR) at a nominal price.

IRFC's lending activities are also noteworthy. The company provides funds to various companies in the railway sector, including Rail Vikas Nigam Limited (RVNL), Konkan Railway Corporation Limited, Rail Land Development Authority, Railtel Corporation of India, and Pipavav Railway Corporation Limited. As of March 2021, 46% of the loans and advances were towards lease receivable from MoR, 52% were towards advance against the lease of railway infrastructure assets and advance against National Project, and the remaining 2% of loans were provided to IRCON and RVNL.

A significant portion of IRFC's revenue is generated from the leasing of rolling stock assets, comprising locomotives, passenger coaches, and freight wagons, to the Indian Railways. As of March 31, 2020, more than 75% of Indian Railways rolling stock fleet stands financed by the company. The company also financed 67% of the capital outlay of the Indian Railways in FY21.

IRFC's operational highlights in FY21 include meeting the highest-ever target of ₹1,04,369 crore to meet the funding requirement of Indian Railways for the acquisition of Rolling Stock, for projects and EBR – IF, for projects under EBR (Special), and for financing requirement of RVNL. The company successfully met the target by transferring the required amount of funds.

In FY21, the company raised $3 billion through a Syndicated Foreign currency denominated USD loan from SBI, Hong Kong. It further raised JPY equivalent to $325 mn through Syndicated JPY Loan from SMBC and mobilized around ₹842 crore through 54EC Bond. As of September 30, 2021, borrowings from the domestic capital market form 49% of the total borrowings, followed by rupee term loans which form 25% of the total borrowings. The remaining 26% of the borrowings are from foreign currency loans and external commercial borrowings.

Financial Highlights and Contribution to the Development of Indian Railways

In addition to the successful fundraising, IRFC has also reported robust financial performance in FY21. The company's total income for FY22 stood at ₹20,179 crore, while its profit after tax (PAT) was reported at ₹6,090 crore. IRFC's net worth also increased to ₹40,996 crore, which reflects the company's strong financial position.

As the Indian government continues to focus on infrastructure development, Indian Railway Finance Corporation Ltd (IRFC) is well-positioned to benefit from the surge in investment in the railway sector. With the Vande Bharat Express leading the charge and plans for 400 trains in the next 3-4 years, the railway sector is set to grow rapidly. And with the government planning an expenditure of ₹10,00,000 crore for the next 8-10 years to develop railway infrastructure, IRFC has a significant role to play.

IRFC's successful fundraising, strong financial performance, and continued contribution to the development of the Indian Railways network reflect the company's resilience and commitment to its stakeholders. 

The Bottom Line 

As we've seen, IRFC has a strong track record of growth, with impressive net income and CAGR figures over the last decade. With its limited expenses and government tax exemption, IRFC is a company that investors should keep on their radar. 

Speaking of identifying companies with strong fundamentals and growth prospects in the infrastructure sector, another great example is CDSL (Central Depository Services Limited). In another article, we highlighted how CDSL's financials and growth potential make it an attractive investment opportunity for those looking to tap into India's booming economy with the parameters in line with Prasad’s checklist.

With a solid track record of revenue growth, high profit margins, and a strong position in India's depository industry, CDSL is a company that investors should keep on their radar alongside IRFC.

By identifying companies with strong fundamentals, solid growth prospects, and a focus on the infrastructure sector, investors can position themselves to capitalize on India's infrastructure development boom.