Indian Railways Finance Corporation Result update Q1FY24

Overview:

Indian Railway Finance Corporation (IRFC) Ltd, established in December 1986, serves as the financing arm for the Indian Railways. Registered as a non-deposit taking NBFC and infrastructure finance company with the RBI, its primary goal is to secure funds from the financial market for the acquisition and creation of assets, which are then leased to the Indian Railways and other entities. IRFC issues both taxable and tax-free bonds and obtains term loans from banks and financial institutions for its borrowing and lending activities within the Ministry of Railways (MoR).

Diversified Borrowing Mix :

 IRFC boasts a diverse funding profile, encompassing taxable and tax-free bonds, term loans, commercial papers, and external commercial borrowings (ECB). Its strong CRISIL/ICRA ratings (AAA/A1+) have allowed it to secure low-cost borrowings. As of June 30, 2023, the company’s total debt stood at INR 4,10,099 crore, comprising ECB bonds (45%), term loans (32%), ECB (16%), and other sources. IRFC enjoys a margin of 40 bps/35 bps over the weighted average cost of borrowing for financing Rolling Stock and Project Assets, respectively, for FY23.

 Clientele:

In addition to lending to the Indian Railways, IRFC extends loans to other entities within the Ministry of Railways, such as Rail Vikas Nigam Ltd and IRCON International Limited.

Financial Performance:  

Robust AUM Growth in Q1FY24:

In Q1FY24, IRFC’s Assets Under Management (AUM) reached INR 4,66,251 crore, reflecting an 8% YoY growth and a 5-year CAGR of 23.88%. These assets are diversified across railway assets (47.53%), rolling assets (38.10%), project assets (13.30%), and other assets (1.06%). With 98.94% of AUM exposure to the Ministry of Railways, the credit risk is minimal. However, Q1FY24 disbursements have declined over the last three years.

Cost of Borrowing Increase during FY22-23:

The weighted average cost of IRFC’s borrowings for rolling stock increased to 7.51% p.a. in 2022-23 from 6.62% in the previous year, attributed to the RBI’s rate hikes. Despite this, IRFC maintains a margin over its borrowing costs for FY23, and its Net Interest Margin (NIMS) stood at 1.33% in Q1FY24.

Zero Taxation, Nil GNPA + Robust Capital Adequacy:

IRFC’s lending to the Ministry of Railways, with an exposure of 98% of its AUM, results in a credit cost of Nil. This has led to a robust capital adequacy ratio of 627.57% in Q1FY24, contributing to high credit ratings from CRISIL (AAA) and ICRA (A+). The company’s tax-free status since FY19 has added value to its earnings.

Valuation and Key Ratios:

IRFC’s stock is currently trading at 2.30x FY23 (TTM) book value of INR 36 per share, with a market value of INR 82.8. Although the return ratios (ROE/ROA) have slightly decreased to 12.69%/1.33% in Q1FY24 from 14.83%/1.59% in Q1FY23, the company’s strong AUM growth, zero GNPA, healthy capital position, and cost-plus model suggest potential for higher valuations in the upcoming quarters.

Q1FY24 Results:

In Q1FY24, IRFC reported a notable 18.69% YoY increase in revenue, primarily driven by a 25% growth in interest income and a 15% growth in lease income. However, interest expenses also increased by 29.22% YoY due to rising borrowing costs, resulting in a 5.90% YoY decline in Net Interest Income (NII) to INR 15,882 million. Net profit decreased by 6.32% YoY to INR 15,565 million, with NIMS standing at 1.33% in Q1FY24. The EPS for the quarter was INR 1.19, reflecting a 6% YoY decrease.

Conclusion:

IRFC’s diverse borrowing mix, robust AUM growth, low credit risk, and favorable tax status position it as a strong player in the financing of Indian Railways and related projects. Although recent increases in borrowing costs have affected profitability, its capital adequacy and credit ratings remain strong, suggesting potential for future growth and improved valuations.