Recommendation from Finance - NBFC Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

INDIAN RAILWAY FINANCE CORP. LIMITED PICKING UP SPEED

HERE IS WHY
✓ Huge outlay for Indian Railways
✓ Expansion of the Vande Bharat trains
✓ Rising demand for infrastructure upgrades

The Indian railway system is regarded as the foundation and lifeblood of the country’s economy. Indian railways span thousands of kilometres practically covering the entire nation, making it the fourth-largest in the world after the US, China and Russia. Due to their low cost and effective operations, railways continue to be the most popular means of transportation for most Indians when travelling long distances. As of December 2023, the 61,508 km length of the broad-gauge network has been electrified. With this, Indian Railways is rapidly progressing towards its target of 100 per cent electrification and becoming the largest green railway network in the world.

Under the Union Budget 2023-24, a capital outlay of ₹2.40 lakh crore (USD 29 billion) has been allocated to the Ministry of Railways, which is the highest ever outlay. There is a huge future potential left for the growth of Indian Railways and keeping that in mind, our choice of low price scrip for this issue is Indian Railway Finance Corporation Limited (IRFC). Incorporated in 1986, IRFC borrows funds from the financial markets to finance the acquisition or creation of assets which are then leased out to the Indian Railways as finance leases. The company is a funding arm of the Indian Railways for mobilising funds from domestic and overseas’ capital markets. IRFC is also registered as a systemically important non–deposit– taking NBFC and infrastructure finance company. Its business is divided into three major parts which include financing the acquisition of rolling stock assets, leasing of railway infrastructure assets, and lending to other entities under the Ministry of Railways.

IRFC has been benefiting from the government’s focus on infrastructure development, particularly in the railway sector. This has led to potential growth opportunities for the company. IRFC is diversifying its loan portfolio to include other railway projects, mitigating risk and fostering sustainable growth. The rising demand for railway infrastructure upgrades is expected to fuel IRFC’s loan book growth. The introduction of sleeper coaches in Vande Bharat trains is expected to increase the demand for faster, more comfortable trains, potentially increasing loan requirements.

The ambitious plan to convert 40,000 existing coaches to meet Vande Bharat standards also presents significant funding opportunities. The development of sleeper coaches and metro versions of Vande Bharat trains signifies continuous innovation in the railway sector. In Q3FY24, on a standalone basis, the net revenue of company grew by 9.80 per cent YoY to ₹2,334.87 crore compared to ₹2,126.54 crore from the previous year’s same quarter. On a sequential basis, its revenue increased by 5.33 per cent.

The PBIDT excluding other income increased by 8.39 per cent to ₹6,706.43 crore YoY as compared to ₹6,187.58 crore from the previous year’s same quarter, while sequentially decreasing marginally by 0.39 per cent. Its profit after tax (PAT) stood at ₹1,604.23 crore compared to ₹1,633.45 crore, a YoY decrease by 1.79 per cent, while sequentially it increased by 3.51 per cent from ₹1,549.87 crore. The company is currently trading at a PE of 31.6 times as against the industry PE of 22.6 times. In the last three years, the company has delivered an average ROE of 14.7 per cent and ROCE of 5.15 per cent. Considering the growth of railways in India and the need for financing the various projects, we recommend BUY.