Explained: Should you invest in the IRFC IPO?

The initial public offering of Indian Railway Finance Corporation (IRFC), a subsidiary of the Indian Railways, has been subscribed 65 per cent on January 18 — the first day of bidding. The offer received bids for 80.89 crore equity shares against an IPO size of over 124.75 crore equity shares, the bidding data available on the exchanges showed.

What does the issue entail?

IRFC is the first initial public offer in the calendar year 2021 and the first public issue by a railway non-banking financial company. Investors can participate in the issue by placing bids in a lot size of 575 shares, translating to Rs 14,950 per lot. Through the initial public offer, the Centre, the promoter of IRFC, will offload 13.6 per cent stake in the company, bringing the promoter shareholding to 86.4 per cent post-issue. At the higher price band of Rs 26 per share, the government would raise Rs 3,243 crore and the company will have a market cap of Rs 23,845 crore.

Should investors subscribe?

IRFC is the dedicated market borrowing arm of the Indian Railways. The extensive expansion plans of the Railways in the future will involve significant financing and the operation of IRFC will increase significantly, according to analysts. The downside is that the company’s fortunes are tied to the Indian Railways’ capex plans.

According to ICICIdirect.com, as a dedicated finance arm of Indian Railways, IRFC remains a low-risk model with no non-performing asset with a return on equity of 11-12 per cent.

Analysts at Anand Rathi Financial Services have also given a ‘subscribe’ rating to IRFC. “We believe the company is reasonably valued at current valuation and enjoys high creditworthiness. However, it is highly dependent on Indian Railways’ capex plans,” analysts added.

The IPO note of the brokerage also added that the Government of India has undertaken various policy interventions in order to liberalise the Railways including the development of freight corridors, high-speed railway and elevated corridors. Analysts at Angel Broking said they expect the company to post strong growth driven by capex by Indian railways, along with stable margins due to the cost-plus model.