Why IRFC ( Indian Railway Finance Corp Ltd ) is a good investment: Another HDFC, IRCTC but with zero NPA.

IRFC is the financial arm of Indian railways. Any funds requirement of Indian Railways are taken care by IRFC. The business model is that IRFC raises funds from markets and give the money by putting 40 basis points Interest spread on top of that. Bonds of IRFC are AAA rated by all agencies primarily because they are backed by Indian government. Hence, IRFC never face any problem raising funds.

Here are the reasons why it is a good bet:

1. It is just like another public sector bank which raises money and lends to someone. But difference is that it only lends to Indian railways; hence money is 100% safe. It is the ONLY bank which has Zero NPA. Even HDFC or Kotak Bank does not have Zero NPA.
2. It can be considered as something like Power Finance or HUDCO or REC ( Rural Engineering Corporation ) which are also government enterprises doing lending business. But difference again is that as it lends only to Indian railways ; there is no NPA.
3. All the loans it makes to Indian Railways are supported by collateral. So again they are safe.
4. Have dividend yield of around 5%.
5. Trading at less than book value. P/BV = 0.84
6. PE multiples of only 7
7. Revenues and profits are growing at very good pace. In future also there is huge scope of modernization in Indian Railways; hence these numbers will keep going up. @credits for this data: Ticker Tape

7. It has monopoly in arranging finances for Indian Railways; very similar to IRCTC. And we all know that IRCTC has given 5x returns in last 2 years.

8. Government is focusing on Infrastructure and Railways is key component of it. Even in this budget huge allocation has gone to Railways. https://www.financialexpress.com/budget/indian-railway-budget-2022-live-updates-nirmala-sitharaman-narendra-modi-new-trains-railway-fare-2022-ntpc-rrb-latest-news/2421087/

9. Company has to pay zero Income tax to Indian government; which means more earnings.

Fine Prints from IRFC documents which supports that all loans to Railways are safe:

1. Additionally, In the event the Issuer does not have sufficient funds to redeem bonds or repay term loans owing to inadequate cash flows during the fiscal year, the MoR (Ministry of Railways) is required under the Standard Lease Agreement to provide for such shortfall, through bullet payments in advance prior to maturity of the relevant bonds or term. IRFC has not utilized this provision to meet its repayments till now
2. All financial risk such as interest rate risk and exchange rate variation risk is passed onto the MoR
3. In FY21, IRFC was entitled to a margin of 40 bps over weighted average cost of incremental borrowing. What this mean is that this 40 basis point is neat money IRFC gets without taking any risks.
4. Business Model:

Risks:

1. If market goes down; IRFC will also go down but IRFC should out-perform.
2. Still government holds around 85% of shares. Whenever government dilutes it; there can be extra pressure on it. If prices goes up; which this article anticipates; then government will be more inclined to offload its stake. But in long run; it will be good as government stake comes down.
3. In general government enterprises do not command higher valuations ( except IRCTC ) because of perceived in-efficiencies.
4. It has very high debt equity; but that is the way any bank or NBFC will be. That is their business which is to take debt.

P.S.

This is my opinion and I was wrong many times in past. I would appreciate if anyone having counter reasons to comment on this blog and educate me.

Just for records; today’s closing price of IRFC is 23 INR; and Nifty is at 17463 and date is 09 Feb, 2022.

Edit: I have exited this stock on 8th Sep 2023 @ 75.6 and invested proceeds into Quess. Nifty is at 19800.