IRFC IPO To Open On 18 January: Should You Subscribe?

The initial public offering (IPO) of the Indian Railway Finance Corporation (IRFC) is set to open on 18 January 2020. Valued at Rs 4,633 crore, it will be the first IPO from a public-sector non-banking financial company (NBFC).

IPO Details

• IPO will be open from 18 January to 20 January.
• Price of the IPO is Rs 25 to 26 per equity share.
• The market lot size is 575 shares, which means the minimum order quantity to bid at the IPO will be 575 shares. A retail-individual investor can apply for a maximum of 13 lots (7475 shares).
• Shares of the company will be listed on BSE and NSE.

The IRFC IPO will comprise of up to 178.20 crore shares, which will include a fresh issue of up to 118.80 crore shares and offer for sale (OFS) of up to 59.40 crore shares by the government, as per its draft prospectus.

At the upper price band, the company hopes to raise Rs 4,633 crore and at the lower end Rs 4,455 crore.

Ahead of the IPO, on Friday, IRFC raised Rs 1,390 crore from 31 anchor investors by allotting about 53.46 crore equity shares at the upper price band of Rs 26 per share.

About 61% of the anchor investment portion was allotted to four domestic mutual funds such as HDFC, Nippon Life, Invesco and ITPL who have applied through 20 schemes while about 16.93% was subscribed by the Government Of Singapore.

About IRFC

The company's principal business is to borrow funds from the financial markets to finance acquisition/ creation of assets which are then leased out to the Indian Railways.

IRFC, set up in 1986, is a dedicated financing arm of the Indian Railways for mobilising funds from domestic as well as overseas markets.

Its primary objective of IRFC is to meet the predominant portion of 'extra-budgetary resources' requirement of the Indian Railways through market borrowings at the most competitive rates and terms.

The Union Cabinet had in April 2017 approved listing of five railway companies. Four of them (IRCON International Ltd, RITES Ltd, Rail Vikas Nigam Ltd and IRCTC) have already been listed.

IRFC has strong seen strong growth. In the last five years, its total income showed a CAGR (compound annual growth rate) of 12.99%. The profit after tax grew at a CAGR of 33.95%. Its IRFC's total assets grew at a CAGR of 16.04%.

Factors to consider before subscribing to IRFC IPO

• Since it is the financial arm of the Indian Railways (largely controlled by the Government of India), there isn't any ideal benchmark company to compare business model or valuations with.
• A change in the Ministry of Railways policies with regard to IRFC or the workings of railways in India can affect its profitability. It is susceptible to the Ministry's initiatives to modernize the Railways and other such policies.
• Its profits also depends on the revenue earned by the Indian Railways.
• Despite having long-term debt, IRFC runs a risk-free business as long as its Standard Lease Agreement with Railway Ministry keeps on renewing. The renewals happen at the end of every fiscal year, which cannot be guaranteed. Its financial condition also depends on the margin on the Rolling Stock Assets leased to the Railways.
• The primary market has seen strong investor participation in 2020 and similar interest is expected to be seen this year, making it a good bet for listing gains. However, since the IPO will clash with that of Indigo Paints, there may be division in subscriber participation levels, reducing chances of a huge over-subscription. Analysts believe that the issue is more suited for investors with a medium to long-term view.
• Most brokerages have given a 'subscribe' rating to the IPO.
• GEPL Capital has recommended 'subscribe' rating to the issue for the long-term on the back of the relatively low-risk business model, strategic role in financing growth of Indian Railways and long-term prospects considering electrification and network expansion.