IRFC IPO kicks off today: Cheap valuation, low-risk model; should you subscribe to the share sale?

New Delhi: Indian Railway Finance Corporation (IRFC) has kicked off its Rs 4,633-crore IPO today through which the company is offering 575 crore shares to the public. IPO will close on January 21 and the price band has been fixed at Rs 25 to Rs 26 per share. Out of the total issue size, 35% is reserved for retail investors.

After this IPO, the shareholding will come down to 86.4%, from 100%, and the good news is that it will reserve Rs 50 lakh worth of shares for eligible employees.

A fresh issue of 1,188,046,000 shares aggregating up to Rs 3,089 crore and an offer for sale (OFS) of 594,023,000 shares by the government worth Rs 1,544 crore. Minimum bids for the issue can be of 575 equity shares and in multiples thereafter.

In the financial year 2020, IRFC financed 48% or Rs 71,392 crore of the Railways’ actual capital expenditure. This offers ample scope for IRFC to grow its business. The company’s revenue grew by 20% annually to Rs 13,421 crore while net profit rose by 26.2% to Rs 3,192 crore between FY18 and FY20.

The total revenue rose 22.15 per cent to Rs 13,421 crore in FY20 from Rs 10,987 crore in FY19. Sales were up 19.33 per cent in FY19. Profit for the six months ended September 30 stood at Rs 1,886.84 crore against Rs 3192 crore5 in FY20, Rs 2,140 crore in FY19 and Rs 2,001 crore in FY18.

Looking at the total equity after the IPO, Railway Finance Corporation demands a price-book (P/B) multiple of one. This is actually an attractive as other NBFCs having sound fundamentals and strong asset quality command a much higher P/B of beyond three. As it is a low-risk business model, cheaper valuation and center’s focus is on expanding railways in the country.

Considering the total equity after the IPO, IRFC demands a price-book (P/B) multiple of one. This valuation is certainly attractive as other NBFCs having sound fundamentals and strong asset quality command a much higher P/B of beyond three. So given the low-risk business model, cheaper valuation and the government’s focus on expanding railway infrastructure in the country, the issue is a subscribe for the long term, say analysts.

Another fact that needs to be mentioned here is that nine out of the 14 PSU IPOs launched since 2017 have been unable to outperform the benchmark indices during the period, the Economic Times mentioned in a report. However, IPOs of the Railways-related companies IRCTC and Rail Vikas Nigam have so far bettered the index returns since listing in 2019.